PROSPECTUS SUPPLEMENT Filed pursuant to Rule 424(b)(5)
(To Prospectus dated May 12, 1995) Registration Statement
Nos. 33-59594 and 33-51073
$275,000,000
NIAGARA MOHAWK POWER CORPORATION
FIRST MORTGAGE BONDS, 7 3/4% SERIES DUE MAY 15, 2006
---------------
INTEREST PAYABLE MAY 15 AND NOVEMBER 15
---------------
Interest on the New Bonds is payable semi-annually on May 15 and
November 15, commencing November 15, 1995. The New Bonds are not
redeemable prior to maturity and are not entitled to any sinking fund. The
New Bonds will be issued only in the form of registered Bonds without
coupons in denominations of $1,000 and multiples thereof. See
"Supplemental Description of New Bonds."
---------------
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.
===========================================================================
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(2) Company(1)(3)
---------------------------------------------------------------------------
Per Bond . . . . . . . . . 100% .65% 99.35%
--------------------------------------------------------------------------
Total . . . . . . . . . . . $275,000,000 $1,787,500 $273,212,500
===========================================================================
(1) Plus accrued interest from May 15, 1995.
(2) See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at
$2,965,000.
---------------
The New Bonds are offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the New Bonds will be made in New York City on or about May 23,
1995.
---------------
PAINEWEBBER INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON BROTHERS INC
_______________
The date of this Prospectus Supplement is May 16, 1995.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NEW BONDS
AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
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, 1994,
1993 and 1992 are derived from the Company's financial statements audited
by Price Waterhouse LLP, independent accountants. The capsule financial
data as of and for the twelve months ended March 31, 1995 are derived from
the Company's unaudited financial information.
12 Months
Ended
March 31, Year Ended December 31,
-------- -------------------------------------
1995 1994 1993 1992
---- ---- ---- ----
(In thousands, except per share data)
Operating Revenues $4,041,433 $4,152,178 $3,933,431 $3,701,527
Operating Income $ 407,430 $ 432,373 $ 524,500 $ 524,326
Net Income $ 157,256 $ 176,984 $ 271,831 $ 256,432
Earnings Available for
Common Stock $ 120,385 $ 143,311 $ 239,974 $ 219,920
Average Number of
Shares of Common
Stock Outstanding 143,711 143,261 140,417 136,570
Earnings Per Average
Share of Common Stock $ .84 $ 1.00 $ 1.71 $ 1.61
Cash Dividends Paid Per
Share of Common Stock $ 1.12 $ 1.09 $ .95 $ .76
As of March 31, 1995
-------------------------------------------------
(In thousands)
Actual As Adjusted*
----------------------- -----------------------
Long-Term Debt** $ 3,190,174 50.9% $3,465,174 53.0%
Preferred Stock*** $ 546,000 8.7% $ 546,000 8.3%
Common Stock Equity $ 2,531,320 40.4% $2,531,320 38.7%
---------- ------ ---------- ------
Total Capitalization $ 6,267,494 100.00% $6,542,494 100.00%
=========== ====== ========== ======
Short-term debt aggregated $456,337,000 at March 31, 1995 (including
$77,337,000 in long-term debt due within one year) and $457,337,000 at May
12, 1995 (including $77,377,000 in long-term debt due within one year).
---------------
* Reflects the issuance of the New Bonds.
** Excludes $77,337,000 of long-term debt due within one year.
*** Excludes $10,950,000 of redemption and sinking fund requirements on
Preferred Stock due within one year.
SIGNIFICANT INVESTMENT CONSIDERATIONS
FIRST QUARTER RESULTS
Earnings for the first quarter of 1995 were $108.5 million or $.75 per
share, as compared with $131.4 million or $.92 per share in 1994. Earnings
for the first quarter of 1995 were impacted by lower sales of electricity
and natural gas due in part to warmer than normal weather. First quarter
1994 earnings included $10.7 of margin recorded under the Niagara Mohawk
Electric Revenue Adjustment Mechanism ("NERAM"), which reduced the effects
of weather in the first quarter of 1994. NERAM was discontinued at year-
end 1994. Earnings for the first quarter of 1995 were favorably affected
by a one-time, non-cash $10 million after-tax adjustment of prior year
demand-side management revenues and a $9 million after-tax gain on the sale
of HYDRA-CO. Enterprises, Inc. ("HYDRA-CO"). The aggregate of these two
non-recurring items recorded in 1995 amounted to $.13 per share.
Electric revenues, including those revenues recorded to reflect the
delay in the rate decision received in April 1995, decreased $51.8 million
or 5.5% from 1994. The revenue recorded reflected the retroactive portion
of the rate decision which was accomplished by recording $26.4 million of
unbilled revenues, which are non-cash revenues. Sales to other electric
systems and sales to ultimate consumers decreased $26.6 million and $56.3
million, respectively, reflecting reduced demand associated with the
warmer-than-normal weather experienced during the first quarter of 1995.
Electric kilowatt-hour sales to ultimate consumers were approximately
8.9 billion in the first quarter of 1995, a 5.8% decrease from 1994
primarily as a result of warmer-than-normal weather. After adjusting for
the effects of weather, sales to ultimate consumers decreased 2.4%. Sales
for resale decreased 835 million kilowatt-hours (45.5%) resulting in a net
decrease in total electric kilowatt-hour sales of 1,384 million (12.3%).
Electric fuel and purchased power costs decreased $6.2 million or
1.8%. This decrease is the result of a decrease in fuel costs of $18.4
million, a $6.1 million net decrease in costs deferred and recovered
through the operation of the fuel adjustment clause, offset by an $18.3
million increase in purchased power costs (including increased payments to
unregulated generators of $28.9 million or 12.3%). The decrease in fuel
costs reflects a 21.2% decrease in Company generation which results from
greater unregulated generator purchase requirements and reduced demand,
which reduced the need to operate the fossil plants during the first three
months of 1995, even after taking into account the Nine Mile Point Nuclear
Station Unit No. 1 refueling outage.
Gas revenues decreased $58.9 million or 19.5% in the first quarter of
1995 from the comparable period in 1994. Due to warmer-than-normal weather
in the first three months of 1995, gas sales to ultimate consumers
decreased 7.8 million dekatherms or a 17.4% decrease from the first quarter
of 1994. After adjusting for the effects of weather, sales to ultimate
consumers decreased 1.0%. Transportation of customer-owned gas increased
17.1 million dekatherms (76.8%) and was primarily caused by Sithe
Independence Power Partners, Inc. gas-fired generating project coming on-
line in the Company's service territory. Spot market sales (sales for
resale) which are generally from the higher priced gas available to the
Company and therefore yield margins that are substantially lower than
traditional sales to ultimate consumers, also decreased. The Company's net
cost per dekatherm sold, as charged to expense and excluding spot market
purchases, decreased to $3.35 in the first quarter of 1995 from $3.72 in
the comparable period in 1994.
RECENT RATE ORDER
For a discussion of the rate order issued by the New York State Public
Service Commission ("PSC") on April 21, 1995, see "SIGNIFICANT FACTORS AND
RECENT DEVELOPMENTS--Rate Matters--1995 Five-Year Rate Plan Filing" in the
Prospectus.
CONSTRUCTION AND FINANCING PROGRAM
The Company's 1995 estimate for construction additions, including
overheads capitalized, nuclear fuel and allowance for funds used during
construction ("AFC"), is approximately $380 million, and is expected to be
funded by cash provided from operations. Mandatory debt and preferred
stock retirements and other requirements are expected to add approximately
$77 million (expected to be refinanced from external sources) to the
Company's capital requirements, for a total of $457 million. Current
estimates of total capital requirements for the years 1996 to 1999 are
$475, $408, $480 and $566 million, respectively, of which $406, $358, $410
and $358 million relates to expected construction additions. The estimate
of construction additions included in capital requirements for the period
1996 to 1999 will be reviewed by management during 1995 with the objective
of further reducing these amounts where possible.
During January 1995, the Company completed the sale of its wholly-
owned subsidiary, HYDRA-CO. Cash proceeds of approximately $207 million
were used to reduce short-term debt, which aggregated over $400 million at
December 31, 1994.
The Company's ability to issue more common stock to improve its
capital structure is limited by the uncertainties that have depressed the
stock's price. The Company would not likely pursue a new issue offering
unless the common stock price was closer to book value. Under its charter
the Company is restricted from issuing preferred stock as of March 31,
1995, due to insufficient ratio coverage. External financing for 1995 is
projected to consist of $400 to $600 million of First Mortgage Bonds,
including the issuance of the New Bonds. Proceeds of the New Bonds will be
used to reduce short-term debt.
Depending on the Company's results under its new rate order, received
April 21, 1995, and the outcome of the multi-year rate case (described in
the Prospectus under "SIGNIFICANT FACTORS AND RECENT DEVELOPMENTS--Rate
Matters"), cash provided by operations is generally expected to provide
sufficient funds for the Company's anticipated construction program for
1996 to 1999. External financing plans of the Company are subject to
periodic revision as underlying assumptions are changed to reflect
developments, most importantly in its rate proceedings. The ultimate level
of financing during this four-year period will reflect, among other things,
the extent and timing of rate relief, the Company's competitive positioning
and the extent to which competition penetrates the Company's markets,
uncertain energy demand due to economic conditions and capital expenditures
relating to distribution and transmission load reliability projects, as
well as continued expansion of the gas business. Environmental standards
compliance costs, 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 also will impact the amount and type of
future external financing.
The provisions of the federal Clean Air Act Amendments of 1990 ("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 has
evaluated options for compliance with the various provisions of Phase I of
the Clean Air Act, which becomes effective May 31, 1995 and continues
through 1999. The Company spent approximately $32 and $19 million in 1994
and 1993, respectively, and has included $6 million for Phase I in its
construction forecast for 1995 through 1999, to make combustion
modifications at its fossil fired plants, including the installation of
low NOx burners at the Dunkirk and Huntley plants. With respect to Phase
II, preliminary estimates for compliance anticipate approximately $17
million in capital costs. The Company anticipates that additional
expenditures of approximately $70 million may be necessary for Phase III,
to be incurred beyond 2000. As part of the Company's cost cutting effort
and due to the surplus of power from unregulated generators, the Company
announced in May 1995, that it intends to place the oldest four of the six
units at the Huntley Steam Station, representing approximately
400 megawatts, in cold standby over the next five years.
The Company has initiated a ten to fifteen year site investigation and
remediation program in respect of certain Company-owned and Company-
associated hazardous waste sites that seeks a) to identify and remedy
environmental contamination hazards in a proactive and cost-effective
manner and b) to ensure financial participation by other potentially
responsible parties ("PRP's"). The Company is currently aware of 89 sites
with which it has been or may be associated, including 47 which are
Company-owned. With respect to non-owned sites, the Company may be
required to contribute some proportionate share of remedial costs.
As a consequence of site characterizations and assessments completed
to date and negotiations with PRP's, the Company has accrued a liability of
$240 million, representing the low end of the range of its share of the
estimated cost for investigation and remediation. The potential high end
of the range is presently estimated at approximately $1 billion, including
approximately $500 million assuming the unlikely event that the Company is
required to assume 100% responsibility at non-owned sites.
In the Company's 1995 rate order, costs incurred during 1995 for the
investigation and restoration of Company-owned sites and sites with which
it is associated will be subject to 80%/20% (ratepayer/Company) sharing.
In 1995, the Company estimates it will incur $13.5 million of such costs,
resulting in a potential disallowance of approximately $2.7 million (before
tax), which the Company has accrued as a loss in other items (net) on the
income statement. The accrued loss will be subject to adjustment based on
actual expenditures made in 1995. The PSC stated in its order that the
decision to require sharing will be revisited for 1996 and beyond in multi-
year negotiations. Accordingly, if the 80%/20% (ratepayer/Company) sharing
were to continue to be applied to rate years beyond 1995, the Company would
be required to write off 20% of its then outstanding balance associated
with environmental restoration costs ($237 million as of January 1, 1995,
including $10 million of which is expected to be recovered in 1995). A
generic PSC study of this matter is in process and the results are expected
to be available for consideration in the Company's multi-year rate
negotiations. At this time, the Company is unable to predict the outcome
of the study.
The Company's cost of financing and access to markets have been and
could be further negatively impacted by events outside its control. The
Company's securities ratings could be negatively impacted by, among other
things, the Company's obligations to purchase power from unregulated
generators. Rating agencies have expressed concern about the impact on
Company financial indicators and risk that unregulated generator financial
leveraging may have. The Company's securities ratings and the terms of its
access to capital markets could also be negatively impacted by an adverse
outcome in the multi-year rate proceeding or rapid expansion of competition
in the Company's service territory.
The Company's securities ratings are:
Credit Rating*
First
Mortgage Preferred Commercial
Bonds Stock Paper
-------- --------- ----------
Standard & Poor's Corporation **BBB- ***BB+ A-3
Moody's Investors Service **Baa3 ***ba1 P-3
Duff & Phelps BBB **BBB- Not Applicable
Fitch Investors Service BBB **BBB- Not Applicable
___________
* 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.
** Lowest investment grade rating.
*** Highest non-investment grade rating.
On May 10, 1995, Moody's Investors Service (Moody's) downgraded the
Company's rating on secured debt from Baa2 to Baa3. This action changed
the Company's rating on secured debt to the lowest investment grade rating.
The rating on preferred stock was changed from baa3 to ba1, which changed
the Company's rating on preferred stock from the lowest investment grade
rating to a below investment grade rating. The commercial paper rating was
changed from P-2 to P-3. Moody's cited, among other things, the impact of
the Company's high-cost structure (largely unregulated generator
obligations and taxes) on its competitive profile which, coupled with a
stagnant service territory economy and excess capacity in the region,
appears to limit sales growth and opportunities for financial improvement.
Moody's also indicated that the rating outlook remains negative.
On May 12, 1995, Standard and Poor's Corporation (S&P) affirmed its
security ratings on the Company's securities. However, S&P removed the
Company from its "CreditWatch" list in light of recent positive regulatory
actions in New York state. S&P cited similar concerns to those expressed
by Moody's in retaining a negative rating outlook for the Company's
securities.
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 May 1, 1995, the Company had the ability to issue $2,548 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 $1,311 million issuable on the basis of retired bonds without
regard to an interest coverage test and approximately $1,237 million
issuable on the basis of Additional Property (as defined in the Mortgage)
currently certified and available, assuming a 10% interest rate, under the
applicable tests set forth in the Mortgage. These amounts do not give
effect to the issuance of the New Bonds. A total of $200 million of
Preference Stock is also currently available for sale. The Company
continues 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 December 31, 1994, totaled $580 million are used by the Company
to enhance flexibility as to the type and timing of its long-term security
sales. Of the $580 million total available, $200 million is represented by
a Revolving Credit Agreement which expires in 1997. The remainder of the
arrangements are subject to review by the lenders on an ongoing basis with
interest rates negotiated at the time of use. In 1994, the Company also
obtained $161 million in bank loans, which will expire in 1995 and which
the Company expects to renew.
In addition, the Company's Charter restricts the amount of unsecured
indebtedness that 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 BONDS
The following description of the particular terms of the New Bonds
offered hereby supplements the description of the general terms and
provisions of the New Bonds set forth in the Prospectus under "Description
of New Bonds," to which description reference is hereby made.
Interest and Payment. The New Bonds will bear interest from May 15,
--------------------
1995 and will mature May 15, 2006. Interest on the New Bonds will be paid
semi-annually on May 15 and November 15, commencing November 15, 1995.
(Supplemental Indenture, Part I).
Redemption of New Bonds. The New Bonds are not redeemable prior to
-----------------------
maturity at the option of the Company, by operation of any sinking fund,
debt retirement, or the maintenance fund provided in the Mortgage.
(Supplemental Indenture, Parts I and II).
Other. Other than the security afforded by the lien of the Mortgage
-----
and restrictions on the issuance of additional first mortgage bonds
described in the Prospectus, the Mortgage does not contain any
covenants or other provisions that are specifically intended to afford
holders of the New Bonds special protection in the event of a highly
leveraged transaction. However, such a transaction would require
regulatory approval and management of the Company believes that such
approval would be unlikely in a highly leveraged context.
Concerning the Trustee. Effective January 1, 1994, Marine Midland
-----------------------
Bank, N.A., formerly a national banking association, became a trust
company duly organized and existing under the laws of the State of New
York, to be known as Marine Midland Bank.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters has severally agreed to
purchase, the principal amount of the New Bonds set forth opposite its name
below.
Principal Amount
Underwriter of New Bonds
----------- ---------------
PaineWebber Incorporated $ 91,668,000
Donaldson, Lufkin & Jenrette Securities Corporation 91,666,000
Salomon Brothers Inc 91,666,000
------------
Total $275,000,000
============
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the New Bonds, if any
are taken.
From time to time, the Underwriters and certain of their affiliates
have engaged and may in the future engage in transactions with and perform
services for the Company in the ordinary course of business.
The Company has been advised by the Underwriters that they propose to
offer the New Bonds to the public at the initial public offering price set
forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of .40% of the
principal amount of the New Bonds. The Underwriters may allow, and such
dealers may reallow, a discount not in excess of .25% of the principal
amount of the New Bonds to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be
changed.
The New Bonds are a new issue of securities with no established
trading market. The Company has been advised by the Underwriters that the
Underwriters intend to make a market in the New Bonds but are not obligated
to do so and may discontinue market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for the
New Bonds.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
LEGAL OPINIONS
The legality of the New Bonds will be passed upon for the Company
by Reid & Priest LLP and for the Underwriters by Simpson Thacher & Bartlett
(a partnership which includes professional corporations). Paul J. Kaleta,
Esq., Vice President Law and General Counsel, and Reid & Priest LLP have
reviewed the legal conclusions under the caption "Description of New
Bonds," "Description of New Preferred Stock" and "Description of Additional
Common Stock" in the Prospectus.
<PAGE>
PROSPECTUS
$800,000,000
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 $800,000,000.
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 12, 1995
<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, 1994;
2. The Company's Current Reports on Form 8-K dated January 4
and February 15, 1995; and
3. The Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1995.
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) 428-5876.
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 provides
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 owns
an electric company with operations in the Province of Ontario, Canada and
a wind power company with operations in the Province of Alberta, 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.
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:
Twelve Months
Ended March 31, Year Ended December 31,
-------------- --------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
1.86 1.91 2.31 2.24 2.09 1.41
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
Twelve Months
Ended March 31, Year Ended December 31,
--------------- ---------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
1.55 1.63 2.00 1.90 1.77 1.17
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.
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
Until recently, the electric and gas utility industry operated in
a relatively stable business environment, subject to traditional cost-of-
service regulation. The investment community, both shareholders and
creditors, considered utility securities to be of low risk and high
quality. Regulators tended to protect the utility monopoly in exchange for
the utility company providing universal service to customers in its
franchise area. Such protection often encouraged regulators and other
governmental bodies to use utilities as vehicles to advance social programs
and collect taxes. In general, utilities and regulators were inclined
toward establishing a fair rate of return and away from particular price
considerations or incentives for aggressive, long-term cost control. Cash
flows were relatively predictable, as was the industry's ability to sustain
investment grade dividend payout and interest coverage ratios.
The emergence of competition has begun to erode the utility
industry's monopoly position and the regulator's ability to assure the
industry's financial health. For example, the passage of the National
Energy Policy Act of 1992 ("EPAct") is resulting in a rapid increase in
wholesale (a sale to another entity for resale to an end user) competition.
EPAct eases the way for non-utility, unregulated generators to enter the
marketplace and allows the Federal Energy Regulatory Commission (the
"FERC") to require the utility owners of electricity transmission systems
to transport power for wholesale transactions. The speed and extent of
monopoly erosion will be dependent upon a number of company specific
characteristics, including geographic location and electric system
limitations, cost and price of services in relation to neighboring
utilities, opportunity for alternative suppliers and fuels to compete,
economic vitality of the service territory, policies of regulators and
legislators and electric supply/demand balances.
The increasing movement towards a competitive environment has
required regulators on both the state and federal levels to begin to
address the many substantial issues confronting electric utilities. During
1994, the FERC and the New York State Public Service Commission (the "PSC")
each provided or proposed guidelines to address different aspects of
competition. The FERC issued guidelines for pricing electric transmission
service and proposed guidelines for the recovery of stranded costs.
Meanwhile, the PSC, in Phase I of its generic competitive proceeding,
adopted guidelines to govern flexible rates which could be offered by
utilities to retain qualified customers. Phase II of this proceeding will
examine issues relating to the establishment of wholesale and retail
competitive markets.
Competition creates various pressures on the prices of utility
products and services. As the potential for broad based competition grows,
government mandated social programs, burdensome tax structures and other
regulatory initiatives become cost elements that a market based pricing
system will not be likely to support. For the Company, the most
significant of these burdens is state mandated payments to unregulated
generators and excessive taxes such as the gross receipts tax and property
taxes. Due to these factors, the Company's electric industrial rates have
moved from being among the lowest in New York State and the Northeast to
above average.
The most important problem associated with rapidly increasing
competition in electricity markets is that it would create transition
costs. Transition costs are those utility costs in excess of what could be
earned in an open retail market. They exist because of a series of
commitments made by customers, regulators, lawmakers and utilities that
competition would make difficult to keep unless specific provisions are
made to account for them. Commitments made under the current regulatory
system might become stranded if electricity markets were competitively
restructured and the resulting market prices were too low to allow for
recovery of the costs associated with those obligations. Costs which might
become stranded include sunk investments, liabilities (primarily contracts
with unregulated generators), deferred costs and social programs.
Estimates of potential stranded investment exposure for the United States
electric utility industry as a whole range as high as $150 to $200 billion,
compared to a total shareholder equity of $180 billion.
Certain parties in New York State and certain governmental
officials have stated that the best way for the Company to address
competitive issues would be to take substantial, but unspecified in amount,
writedowns of its assets, particularly its nuclear and fossil generating
plants. The Company's position is that any responsible 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. The Company will vigorously contest inequitable
solutions to competitive issues.
In response to these issues, the Company has made significant
progress in managing the costs under its direct control. Since December
1992, the employee level has been reduced by over 3,100, or 27%, to
approximately 9,200 and will be further reduced to about 8,750 during 1995.
Capital spending has also been reduced sharply in recent years, with
electric construction spending in future years expected to be limited to
the level of depreciation expense, thereby resulting in little growth in
traditional rate base. The Company remains focused on materially reducing
its total costs.
Since 1991, the Company has also reduced its expected unregulated
generator expense through contract buyouts and project cancellations. As a
result, the 1995 expenditures are expected to be more than $200 million
below what they would have been had the Company not acted. However, the
Company still faces significant overpayment obligations to unregulated
generators.
In the second half of 1994, the Company was faced with
unprecedented events that had a major impact on it. In August, the staff
of the PSC (the "PSC Staff") proposed an immediate overall decrease in
electric revenues from 1994 levels of approximately $146 million. Then, in
September, the PSC authorized sales by Sithe Independence Power Partners,
Inc. ("Sithe") of retail electricity directly to Alcan Rolled Products
("Alcan"), a large customer of the Company. Financial markets reacted
negatively and the Company's common stock price fell. As a result, the
Company postponed a common stock offering that was planned for the fourth
quarter of 1994.
The Company has considered, and is continuing to consider,
various strategies designed to enhance its competitive position and to
increase its ability to adapt to and anticipate changes in its utility
business. These strategies may include business combinations with other
companies, acquisitions of related or unrelated businesses, and additions
to or disposition of portions of its franchised service territories.
Additionally, a number of electric utilities have recently announced
consideration of plans to organize their operations so that generation and
power supply activities are conducted by an entity within the corporate
group separate from the entity which provides transmission and distribution
services to the utility's customers. The Company is also studying such a
division of its operations, in part because of suggestions by New York
governmental officials that power supply should be separated from
transmission and distribution functions and in part as a means of dealing
with issues related to unregulated generator contracts.
RATE MATTERS
Prior Regulatory Agreements. The Company's results during the
past several years have been strongly influenced by several agreements with
the PSC. A brief discussion of the key terms of certain of these
agreements is provided below.
The 1991 Financial Recovery Agreement implemented the Niagara
Mohawk Electric Revenue Adjustment Mechanism ("NERAM") and the Measured
Equity Return Incentive Term ("MERIT").
The NERAM required the Company to reconcile actual results to
forecast electric public sales gross margin used in establishing rates.
The NERAM produced certainty in the amount of electric gross margin the
Company received 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. The Company's 1995 and multi-year rate
proceedings do not seek to extend the NERAM in view of the pricing
flexibility sought. The lack of a NERAM will inevitably increase earnings
volatility due to variations in weather and economic conditions. See "1995
Five-Year Rate Plan Filing" below. In 1994, the Company deferred for
recovery $101.2 million of revenue under the NERAM mechanism for collection
in 1995 and 1996.
The 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. 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 total available award for 1994 is $34 million and
$41 million in 1995. Through the 1993 MERIT period, the Company has earned
approximately $85.5 million of the $115 million of MERIT available and
presently assesses that it earned approximately $28 million of the $34
million available for 1994.
1993 Rate Settlement. On January 27, 1993, the PSC approved a
1993 Rate Agreement 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 reflected an allowed return on equity of 11.4%, as
compared to the 12.3% authorized for 1992. The agreement also included
extension of the 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.
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.
1994 Rate Agreement. On February 2, 1994, the PSC approved an
increase in gas rates of $10.4 million or 1.7%. The gas rates became
effective as of January 1, 1994 and included for the first time a weather
normalization clause.
The PSC also approved the Company's electric supplement agreement
with the PSC Staff and other parties to extend certain cost recovery
mechanisms in the 1993 Rate Agreement without increasing electric base
rates for calendar year 1994. The goal of the supplement was 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 provided 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
not subject to discounts. 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.
Rate Initiatives. The Company is experiencing a loss of
industrial load across its system for a variety of reasons. In some cases,
customers have found alternative suppliers or are generating their own
power. In other cases a weakened economy has forced customers to relocate
or shut down.
As a first step in addressing the threat of further loss of
industrial load, the PSC approved a rate (referred to as SC-10) under which
the Company was allowed to negotiate individual contracts with some of its
largest industrial and commercial customers to provide them with
electricity at lower prices. Under this rate, customers had to demonstrate
that they could generate power more economically than the Company's
service. While the SC-10 tariff has now been superseded by the SC-11
tariff described below, seventeen contracts are still in effect and expire
by early 1997. The total SC-10 discounts amounted to $12.4 million in
1994.
In June 1994, the PSC announced the adoption of guidelines to
govern flexible electric rates offered by utilities to retain qualified
industrial customers in the face of growing competition from unregulated
generators, and requiring the Company (and other New York utilities with
flexible tariffs) to file amendments to SC-10. On August 10, 1994, the
Company filed for a new service tariff, SC-11, for "Individually Negotiated
Contract Rates." All new contract rates will be administered under the new
SC-11 service classification based on demonstrated industrial and
commercial competitive pricing situations including, but not limited to,
on-site generation, fuel switching, facility relocation and partial plant
production shifting. Contracts will be for a term not to exceed seven
years without PSC approval.
The Company expects a significant number of industrial customers
to negotiate contracts. Many of these contracts may result in increased
load which may be revenue enhancing. As of December 31, 1994,
approximately 20 customers, representing approximately 80 MW of load, had
made requests to the Company for an SC-11 contract. The Company also
offers economic development rates, which can result in discounts for
existing, as well as new, load. In total, the Company granted $39 million
in discounts against 1994 revenues, of which it absorbed 20% pursuant to
the 1994 settlement. Under its 1995 and multi-year rate proposal, the
Company anticipates offering approximately $30 million of discounts in
excess of the approximately $42 million expected to be reflected in rates
in 1995, although no assurance can be given as to the actual amount of
discounts. The amount of discounts given will also depend on the level of
rates authorized in the 1995 rate proceeding and the allocation between
customer classes. The level of discounts beyond 1995 and the attendant
financial consequences will depend on a variety of factors.
The increase in the Company's rates over the past four years, due
in large part to required purchases from unregulated generators, has made
cogeneration and self-generation by many industrial and large commercial
customers more economically feasible. The Company believes its SC-11
tariff pricing flexibility will help prevent erosion of its customer base.
Price pressure, however, may limit the recovery of such costs from the
remainder of its customer base.
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 4, 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 included a proposal to institute a methodology to establish
rates beginning in 1996 and running through 1999. The proposal would
provide for rate indexing to an applicable quarterly forecast of the
consumer price index as adjusted for a productivity factor. The
methodology sets a price cap, but the Company could 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 other 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 included in billing adjustment
factors 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, NERAM and demand-side
management ("DSM"), 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 and reset 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 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, but would also
substantially increase the risk that the Company will not earn its allowed
rate of return and that earnings would be much more volatile than in the
past. The Company believes that its proposed rate plan meets the criteria
for continued application of Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS
No. 71"). Gas rate adjustments beyond 1995 would follow traditional
regulatory methodology. The current rate proceeding has been separated
into two distinct phases. A schedule for the multi-year phase of the
proceeding has not been established, but is expected to extend at least
into the summer of 1995.
Through its Brief Opposing Exceptions as of March 2, 1995, the
Company had requested an increase in 1995 electric revenues of
approximately $110 million (3.5%) and an increase in 1995 gas revenues of
$16.4 million (2.7%).
On April 21, 1995, the Company received a rate decision from the
PSC which approved an approximately $47 million increase in electric
revenues and a $4.9 million increase in gas revenues. The bill impact to
customers is a 1.5% increase for electric (a 3.4% increase for residential
and a 1.6% decrease for large industrial) and an 0.8% increase for gas.
The rate order allows the Company to retain its fuel adjustment clause
mechanism, although the NERAM was discontinued. While the decision
eliminates the administrative law judges' ("ALJ") recommended disallowance
associated with purchases from and buyouts of unregulated generators, it
retains performance-based penalties related to customer service quality and
demand-side management. Further, the decision allocates to ratepayers all
of the $58.4 million of savings associated with the Company's 1994
voluntary employee reduction program. While the Company's March 2, 1995
update assumed such an allocation, capturing all of these savings, in
combination with other adjustments made by the PSC, puts added pressure on
the Company's 1995 earnings levels.
The rate decision establishes allowed returns on equity of 11.0
percent in the electric case and 11.4 percent in the gas case. However,
the Company believes,based on its analysis of the rate order, that its
overall return on equity in 1995, including anticipated MERIT awards, will
range between 8.5 and 9.5 percent. The rate order also addresses the
Company's multi-year electric rate proceeding. The PSC stated that the
parties to this phase must address how to maintain the Company's
investment-grade bond rating, while contending with uneconomic generation
and the high cost of unregulated generator power purchases, high property
taxes, potential elimination of the fuel-adjustment clause, and outdated
governmental mandates. Rate levels and protection of customer service
quality are other key areas which must be considered in a multi-year plan.
As evidenced in the results of the first quarter of 1995, the
combination of the elimination of NERAM and weak sales results is likely to
negatively affect the Company's revenues and earnings for 1995.
Regulatory and Accounting Issues. In accordance with SFAS No.
71, the Company's financial statements reflect assets and costs based on
ratemaking conventions, as approved by the PSC and the FERC. Certain
expenses and credits, normally reflected in income as incurred, are only
recognized when included in rates and recovered from or refunded to
customers. Virtually all costs of this nature which are determined by the
regulators to have been prudently incurred have been recoverable through
rates in the course of normal ratemaking procedures and the Company
believes that the items currently deferred on its consolidated balance
sheet should be afforded similar treatment.
Continued accounting under SFAS No. 71 requires, among other
things, that rates be designed to recover specific costs of providing
regulated services and products and that it be reasonable to assume that
rates are set at levels that will recover a utility's costs and can be
charged to and collected from customers. When a utility determines it can
no longer apply the provisions of SFAS No. 71 to all or a part of its
operation, it must eliminate from its balance sheet the effects of actions
of regulators that had been recorded previously as assets and liabilities
pursuant to SFAS No. 71, but which would not have been so accounted for by
enterprises in general.
The Company's proposed multi-year rate plan for 1996-1999
contemplates no change in this approach to such reporting, even though the
plan recognizes that in a more competitive environment an effective
response to the general pressure to manage costs and preserve or expand
markets is vital to maintaining profitability. The Company's proposed plan
includes the establishment of rates for 1995 on a cost of service basis,
followed by an index-based approach to rates for 1996 through 1999. The
index is based on inflation factors believed to be indicative of cost
increases to be experienced by the Company. The proposal for 1996-1999
also includes adjustment factors related to events outside the Company's
control and a mechanism for resetting rates if the expected return on
equity falls below a minimum threshold. Therefore, the Company believes
that it can continue to apply SFAS No. 71 under its multi-year rate
proposal.
The PSC Staff has proposed a multi-year ratesetting plan which
the Company believes would require writedown of certain assets and
recognition of a loss on uneconomic unregulated generator contracts would
not permit the continued application of SFAS No. 71 to its generation
operations and may similarly jeopardize application of SFAS No. 71 to its
transmission and distribution operations under certain circumstances. The
PSC Staff has proposed the use of an index based on the annual change in a
national average electricity price. Among other things, the PSC Staff's
plan would limit, in increasing amounts, the amount of embedded generation
costs (including certain plant and unregulated generator costs) that could
be charged to customers. The Company would be forced to absorb the
difference between its embedded costs and what it would charge customers,
regardless of whether its past practices were prudent or even mandated by
government action. Rates with respect to the Company's costs of
transmission, distribution and customer service would continue to be based
on cost of service for 1995, but would be indexed in 1996-1999 by the
national average electricity index. In the event that the Company is
required to write down its assets, recognize a loss on uneconomic
unregulated generator contracts and/or could no longer apply SFAS No. 71 to
either its generation operations or to its entire electric business, a
material adverse effect on its financial condition and results of
operations would result.
The Company believes the financial consequences would be of an
order of magnitude that would adversely affect the Company's financial
position and results of operations, its ability to access the capital
markets on reasonable and customary terms, its dividend paying capacity,
its ability to continue to make payments to unregulated generators and its
ability to maintain current levels of service to its customers.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS No. 121"). SFAS No. 121 requires companies, including
utilities, to assess the need to recognize a loss whenever events or
circumstances occur which indicate that the carrying amount of an asset may
not be fully recoverable. An impairment loss would be recognized if the
sum of the future undiscounted net cash flows expected to be generated by
an asset is less than its book value. SFAS No. 121 also amends SFAS No. 71
to require write off of a regulatory asset if it is no longer probable that
future revenues will recover the cost of the asset.
SFAS No. 121, which is applicable in 1996, may have consequences
to a number of utilities, including the Company, which are facing growing
competitive threats that may erode future prices, and which have relatively
high-cost nuclear generating assets and unregulated generator contracts.
As discussed above, the Company is faced with ratemaking proposals by the
PSC Staff in the multi-year rate case that would likely result in asset
impairment issues under the provisions of SFAS No. 121 if such proposal is
adopted by the PSC. In the context of the Company's recently issued 1995
rate order, the Company believes the effects of the adoption of SFAS No.
121 to be immaterial. While the Company has not yet fully assessed the
financial consequences of applying the provisions of SFAS No. 121 if the
PSC Staff's proposal in the multi-year plan is adopted, it would have a
material adverse effect on the Company's financial position and results of
operations.
On March 29, 1995, FERC issued a Notice of Proposed Rulemaking
("NOPR") on Open Access Non-Discriminatory Transmission Services by Public
Utilities and Transmitting Utilities and a supplemental NOPR on Recovery of
Stranded Costs.
The rules proposed in the NOPR are intended to facilitate
competition among generators for sales to the bulk power supply market. If
adopted, the NOPR on open access transmission would require public
utilities under the Federal Power Act to provide open access to their
transmission systems and would establish guidelines for their doing so.
All public utilities would provide such services pursuant to a generic set
of transmission tariff terms and conditions established in the rulemaking
proceeding. Thus, a final rule would define the terms under which
independent power producers, neighboring utilities, and others could gain
access to a utility's transmission grid to deliver power to wholesale
customers, such as municipal distribution systems, rural electric
cooperatives, or other utilities. Under the NOPR, each public utility
would also be required to establish separate rates for its transmission and
generation services for new wholesale service, and to take transmission
services (including ancillary services) under the same tariffs that would
be applicable to third-party users for all of its new wholesale sales and
purchases of energy.
The supplemental NOPR on stranded costs provides a basis for
recovery by regulated public utilities of legitimate and verifiable
stranded costs associated with exiting wholesale customers and retail
customers who become unbundled wholesale transmission customers of the
utility. FERC would provide public utilities a mechanism for recovery of
stranded costs that result from municipalization, former retail customers
becoming wholesale customers, or the loss of a wholesale customer. FERC
will consider allowing recovery of stranded investment costs associated
with retail wheeling only if a state regulatory commission lacks the
authority to consider that issue.
The Company is currently evaluating the NOPR to determine its
impact on the Company and its customers. Comments on the NOPR are due
August 7, 1995. It is anticipated that a final rule could take effect in
early 1996. The Company cannot predict the outcome of this matter or its
effects on the Company's results of operations or financial condition.
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. The 1990
study recommended continued operation of Unit 1 over the next fuel cycle,
and the 1992 study indicated that the Unit could continue to provide
benefits for the term of its license (2009) if operating costs could be
reduced and generating output improved above its then historical average.
The 1994 study again confirmed that continued operation over the
remaining term of its license is warranted. 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 operating experience at Unit 1
has improved substantially since the prior study. As of December 31, 1994,
Unit 1's capacity factor has been about 94% since the 1993 refueling
outage. The Company's net investment in Unit 1 is approximately $575
million, exclusive of decommissioning costs.
On March 15, 1995 the Independent Power Producers of New York
("IPPNY"), a trade association of unregulated generators, filed material
with the PSC claiming that the Company should shut down Unit 1 and that to
fail to do so would put the Company's shareholders at risk in terms of
recovery of the Company's investment in the Unit. IPPNY has previously
taken a similar position in the current rate case and the Company believes
IPPNY's position is motivated by a self-interested desire to reduce
generating capacity in New York State without having its members bear any
of the burden of the current oversupply situation. Under the Financial
Recovery Agreement entered into by the Company in 1989, the Company has
been operating under a special incentive provision that also allows for
recovery of sunk costs if the Unit had been "prudently" retired prior to
early 1995. The Company believes that the most likely way to maximize
recovery of the investment in the Unit is through continued operation.
Since Unit 1 has a low generation cost compared to the price paid for the
output of virtually all of IPPNY's members' generating plants and recently
received improved ratings in the Nuclear Regulatory Commission's ("NRC")
annual review of plant management and operations, it is likely that this
action by IPPNY represents an attempt to reduce competition its own members
face rather than being motivated by either the public interest or IPPNY's
concerns for the Company's shareholders or ratepayers.
Unit 1 Status. On February 8, 1995, Unit 1 was taken out of
service for a planned refueling and maintenance outage. On April 4, 1995,
Unit 1 returned to service. The next refueling outage is scheduled to
begin in February 1997.
Unit 2 Status. On April 8, 1995, Unit 2 was taken out of service
for a planned refueling and maintenance outage. The outage is projected to
last 49 days.
Nuclear Plant Decommissioning. The Company estimates the cost of
decommissioning Unit 1 and its ownership interest in Unit 2 at December 31,
1994 as follows:
Unit 1 Unit 2
------ ------
Site Study (year) 1994 1989(a)
End of Plant Life (year) 2009 2026
Radioactive Dismantlement
to Begin (year) 2026 2029
Method of Decommissioning Delayed Immediate
Dismantlement Dismantlement
Cost of Decommissioning (in 1994 dollars) (in millions)
Radioactive Components $344 $207
Non-radioactive Components 51 33
Fuel Dry Storage/Continuing Care 132 50
--- --
$527 $290
==== ====
(a) The estimate of Unit 2's decommissioning costs was updated by
extrapolating data from the updated Unit 1 decommissioning estimate.
The Unit 2 estimate should be considered preliminary, as the Company
expects to perform a more detailed study in 1995.
The Company estimates by the time decommissioning is completed,
the above costs will ultimately amount to $1.4 billion and $1.0 billion for
Unit 1 and Unit 2, respectively, using 2.3% as an initial inflation factor.
This factor increases gradually, reaching a maximum of 3.4% in the year
2004 and for the years thereafter.
In addition to the costs mentioned above, the Company expects to
incur post-shutdown costs for plant rampdown, insurance and property taxes.
In 1994 dollars, these costs are expected to amount to $110 million and $80
million for Unit 1 and the Company's share of Unit 2, respectively. The
amounts will escalate to $235 million and $405 million for Unit 1 and the
Company's share of Unit 2, respectively.
Based upon a 1989 study the Company had previously estimated the
cost to decommission Unit 1 to be approximately $416 million in 2009 ($263
million in 1994 dollars). In addition, non-radioactive dismantlement costs
were estimated to be $25 million in 1994 dollars. The 1989 estimate was
based upon a dismantlement of Unit 1 at the end of its useful life in 2009.
The $527 million estimate assumes a delayed dismantlement to coincide with
Unit 2 and was prepared in connection with the Economic Study discussed
above. The estimate differs from the 1989 estimate primarily due to an
increase in burial costs and the inclusion of nuclear fuel storage charges
and costs for continuing care. The delayed dismantlement approach should
be the most economic after applying the Company's current weighted average
cost of capital.
The Company, in a 1989 study, estimated its 41% share of the cost
to decommission Unit 2 to be $316 million in 2026 dollars ($112 million in
1994 dollars). In addition, the Company's share of non-radioactive
dismantlement cost was estimated to be $18 million (in 1994 dollars). The
$290 million estimate differs from the 1989 study primarily due to an
increase in burial costs and the inclusion of nuclear fuel storage charges
and costs for continuing care.
Decommissioning costs recovered in rates amount to $134.1 million
and $113.9 million at December 31, 1994 and 1993, respectively for both
Units. The annual allowance for Unit 1 and the Company's share of Unit 2
for the years ended December 31, 1994, 1993 and 1992 was approximately
$18.7, $18.7 and $23.1 million, respectively. These amounts were based on
the 1989 study. The Financial Accounting Standards Board ("FASB") has
added to its agenda a project on accounting for obligations for
decommissioning of nuclear power plants.
The 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, 1994, the fair value of funds accumulated in the
Company's external trusts were $74.0 million for Unit 1 and $18.7 million
for its share of Unit 2. Earnings on the external trust aggregated $13.1
million through December 31, 1994. Amounts recovered for non-radioactive
dismantlement are accumulated in an internal reserve fund which has an
accumulated balance of $37.1 million at December 31, 1994.
The NRC minimum decommissioning cost calculation is based upon a
1986 cost estimate escalated by increases in labor, energy, and burial cost
factors. 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 $381 million in 1994 dollars and the Company's
share of Unit 2 to $173 million in 1994 dollars. The Company's 1995 rate
filing includes an aggregate increase of $8 million in decommissioning
allowances to reflect funding to the increased NRC minimum requirements.
In its next rate filing the Company intends to seek decommissioning
allowances necessary to fund to the Company's 1994 decommissioning
estimates discussed above. There is no assurance that the decommissioning
allowance recovered in rates will ultimately aggregate a sufficient amount
to decommission the units. The Company believes that if decommissioning
costs are higher than currently estimated, the costs would ultimately be
included in the rate process.
UNREGULATED GENERATORS
In recent years, a leading factor in the increases in customer
bills and the 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.
The Company is being forced to make excess payments to
unregulated generators, in comparison with its own costs of production, for
energy and capacity it does not currently need. The Company estimates that
it made excess payments of approximately $205 million in 1993 and
approximately $364 million in 1994 and expects to make excess payments of
approximately $409 million in 1995. The Company has initiated a series of
actions to address this situation, but cannot predict the outcome. Recent
changes in state leadership may change the energy policies of New York
State. The Company will be pursuing actions to redress inequities and
reform regulatory policies that have contributed to the Company's
increasing prices.
As of December 31, 1994, 148 of these unregulated generators with
a combined capacity of 2,592 MW were on line and selling power to the
Company. Of these, 2,273 MW are considered firm capacity (including 207 MW
of unregulated generator projects on standby). By the end of 1994, the
Company had virtually all unregulated generator capacity scheduled to come
into service on line.
In order to control the growth of excess supply, the Company has
taken numerous actions to realign its supply with demand. These actions
include mothballing and retirement of Company-owned generating facilities
and buy-outs of unregulated generator projects, as well as the
implementation of an aggressive wholesale marketing effort. Such actions
have been successful in bringing installed capacity reserve margins down to
levels in line with normal planning criteria. The Company is actively
pursuing other initiatives to reduce its unregulated generator costs.
FERC Proceeding. On January 11, 1995, the FERC issued an order
in a case involving Connecticut Light & Power ("CL&P") that the Public
Utility Regulatory Policy Act ("PURPA") forbids the states from requiring
utilities to pay more than avoided cost to qualifying facilities ("QFs")
for electric power. FERC, however, also ruled that it would not invalidate
any preexisting contracts, but only would apply its ruling prospectively or
to contracts that were subject to a pending challenge (instituted at the
time of signing) by a utility. On the same day, FERC issued an order that
an ongoing challenge by the Company to the New York Law requiring utilities
to pay QFs a minimum of six cents for electric power (the "Six Cent Law")
was moot in light of amendment of that law in 1992 to prohibit future power
purchase contracts requiring the utility to pay more than its avoided cost.
This latter proceeding had been initiated in 1987. In April 1988, FERC had
ruled in the Company's favor, finding that the states could not impose
rates exceeding avoided cost for purchases from QFs, but then stayed that
decision in light of a rulemaking it was instituting to address the issue.
That rulemaking was never completed.
On February 10, 1995, the Company filed a petition for rehearing
of both orders. The Company argues, among other things, that Federal law
requires FERC to apply the ruling in CL&P in all pending cases, including
its case involving the Six Cent Law, and that it is entitled to the
opportunity, either at FERC or in the courts, to demonstrate that
pre-existing power purchase contracts resulting from the Six Cent Law
should be invalidated. The Company argued further that amendment of the
Six Cent Law did not render the proceeding addressing that law moot because
the amendment has perpetuated and, in some instances, expanded the
Company's obligation to purchase power from QFs at rates above avoided
cost. On April 12, 1995 the FERC denied the Company's petitions. On April
21, 1995 the Company filed its petitions for review of FERC's denials of
its petitions for rehearing. The Company otherwise intends to press its
rights vigorously in the courts.
During April 1995, FERC ruled against New York State Electric and
Gas Corp. ("NYSEG") in a case involving contracts with unregulated
generators, despite NYSEG's position that the unregulated generators' rates
exceeded avoided costs. The PSC supported NYSEG in the case, in which the
utility sought to revise long-term contracts signed in 1990 to buy up to 44
megawatts from two unregulated generators. NYSEG argued that the costs it
used to calculate the rates were no longer valid because cheaper power was
now available and the excess contract prices impose a harsh burden on its
electric customers.
Curtailment Procedures. On August 18, 1992, the Company filed a
petition with the PSC which calls for the implementation of "curtailment
procedures." Under existing FERC and PSC policy, this petition would allow
the Company to limit its purchases from unregulated generators when demand
is low. While the ALJ 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, after informing the PSC of its
progress in settlement, the Company requested the PSC to expedite the
consideration of its petition.
Demand for Adequate Assurance. 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.
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 balance 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. The Company has been sued by the owners
of three unregulated generator projects who challenge the Company's right
to demand adequate assurance.
The Company cannot predict the outcome of these federal and state
court 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.
ENVIRONMENTAL ISSUES
The public utility industry typically utilizes and/or generates
in its operations a broad range of potentially hazardous wastes and by-
products. 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 necessary.
The Company is currently aware of 89 sites with which it has been
or may be associated, including 47 which are Company-owned. With respect
to the non-owned sites, the Company may be required to contribute some
proportionate share of remedial costs.
Investigations at each of the Company-owned sites are designed to
(1) determine if environmental contamination problems exist, (2) if
necessary, determine the appropriate remedial actions required for site
restoration and (3) 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
are completed, the Company expects to determine site-specific remedial
actions 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 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.
Estimates of the cost of remediation and post-remedial monitoring
are based upon a variety of factors, including identified or potential
contaminants, location, size and use of the site, proximity to sensitive
resources, status of regulatory investigation and knowledge of activities
at similarly situated sites and the Environmental Protection Agency figure
for average cost to remediate a site. Actual Company expenditures 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 Potentially Responsible Party
("PRP") sites and is contesting liability accordingly.
As a consequence of site characterizations and assessments
completed to date and negotiations with PRPs, the Company has accrued a
liability of $240 million, representing the low end of the range of its
share of the estimated cost for investigation and remediation. The
potential high end of the range is presently estimated at approximately $1
billion, including approximately $500 million assuming the unlikely event
the Company is required to assume 100% responsibility at non-owned sites.
In the Company's 1995 rate order, costs incurred during 1995 for
the investigation and restoration of Company-owned sites and sites with
which it is associated, will be subject to 80%/20% (ratepayer/Company)
sharing. In 1995, the Company estimates it will incur $13.5 million of
such costs, resulting in a potential disallowance of approximately $2.7
million (before tax) which the Company has accrued as a loss in Other items
(net) on the income statement. The accrued loss will be subject to
adjustment based on actual expenditures made in 1995. The PSC stated in
its order that the decision to require sharing will be revisited for 1996
and beyond in multi-year negotiations. Accordingly, if the 80%/20%
(ratepayer/Company) sharing were to continue to be applied to rate years
beyond 1995, the Company would be required to write off 20% of its
regulatory asset associated with environmental restoration costs. A
generic PSC study of this matter is in process, the results of which are
expected to be available for consideration in the Company's multi-year rate
negotiations. At this time the Company is unable to predict the outcome of
the study. The Company has recorded a regulatory asset representing the
remediation obligations to be recovered from ratepayers.
The Company has provided notices of insurance claims to carriers
with respect to the investigation and remediation costs for manufactured
gas plant, industrial waste sites and sites for which the Company has been
identified as a PRP. The Company is unable to predict whether such
insurance claims will be successful.
The Company is a defendant in an ongoing Superfund lawsuit in
Federal District Court, Northern District of New York brought by the
Federal Government. 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. In February 1994, the federal government sued several
entities, including the Company, which did not accept the government's
proposed final terms of settlement. The Company intends to vigorously
oppose and defend against the government's characterization of its
liability in this matter.
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 the 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 adjustments, the Company will be required to absorb a
portion of any assessment. The Company believes any such disallowance will
not have a material impact on its financial position or results of
operations. The Company is currently attempting to negotiate a settlement
of these issues with the Appeals Division of the IRS.
LITIGATION
In March 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
plaintiff sought enforcement of the original contract or compensatory and
punitive damages in an aggregate amount that would not exceed $1 billion,
excluding pre-judgment interest.
In July 1994, the New York Supreme Court dismissed Inter-Power's
complaint for lack of merit. In August 1994, Inter-Power filed a notice of
appeal from this decision. Inter-Power filed its Appellant's Brief in
February of 1995. The Company submitted its Appellate Brief on March 30,
1995 and Inter-Power submitted its Reply Brief on April 17, 1995. The
Appellate Division has scheduled oral argument on this appeal for June 6,
1995. The Company believes it has meritorious defenses and will continue to
defend the lawsuit vigorously.
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 in New York Supreme Court, Erie County, 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. In addition,
on January 18, 1995, the Company was served a Summons and Complaint as one
of 17 defendants named in a toxic tort action filed in the Erie County
Supreme Court (Frazer, et al. v. Westinghouse Electric Corp., et al.).
----------------------------------------------------
The suit alleges exposure on the part of the plaintiffs to toxic chemicals
emanating from the Pfohl Brothers Landfill, resulting in the alleged
causation of cancer in each of the plaintiffs. The plaintiffs seek
compensatory and punitive damages in the amount of approximately $60
million. The Company was notified by the state Department of Environmental
Conservation in 1986 of its status as a PRP in connection with the
contamination of this landfill, but has not taken an active role in the
remediation process because of the existence of minimal evidence that
hazardous substances generated by the Company were disposed there. It has
been alleged, however, that another defendant (Downing Container Division
of Waste Mgt. of N.Y.) transported waste materials to the landfill from the
Company's Dewey Avenue Service Center during the 1960's. 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 both
lawsuits, 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.
In November 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. In January, 1994, the defendants filed a joint motion
to dismiss Fourth Branch's complaint. This motion has yet to be decided.
The Company believes it has meritorious defenses and will continue to
defend the lawsuit vigorously. Fourth Branch has filed for protection
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the
Northern District of New York.
The Medina Power Company is an independent power project with a
contract requiring it to be a QF under federal law or face a contractual
penalty. Having come on-line without a steam host, Medina did not meet
this QF requirement, subjecting it to a 15% rate reduction. The Company
advised Medina that it had exercised its contract right and reduced the
rate accordingly. Medina filed suit against the Company on June 8, 1994 in
Federal District Court, Western District of New York, seeking $40 million
in compensatory damages, a trebling of this amount to $120 million under
the New York State antitrust laws, and $100 million in punitive damages.
The Company believes Medina's case is without merit, but cannot predict the
outcome of this action.
The Company is involved in a number of court cases regarding the
price of energy it is required to purchase in excess of contract levels
from certain unregulated generators ("overgeneration"). The Company has
paid the unregulated generators based on its short-run avoided cost (under
Service Class No. 6) for all such overgeneration rather than the price
which the unregulated generators contend is applicable under the contracts.
The Company cannot predict the outcome of these actions, but will continue
to aggressively press its position.
The Company believes it has meritorious defenses and intends to
defend the above lawsuits vigorously, but can neither provide any judgment
regarding the likely outcome nor provide any estimate or range of possible
loss. Accordingly, no provision for liability, if any, that may result
from these suits has been made in the Company's financial statements.
SITHE/ALCAN
In April 1994, the PSC ruled that, in the event that 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 sells electricity to Consolidated Edison
Company of New York, Inc. and the Company on a wholesale basis from its
1,040 MW natural gas cogeneration plant and provides steam to Alcan. As
authorized by the PSC in September 1994, Sithe also sells a portion of its
electricity output on a retail basis to Alcan, previously a customer of the
Company, and is authorized to sell to Liberty Paperboard ("Liberty"), a
potential new industrial customer. The PSC ordered that Sithe pay the
Company a fee over a period of ten years, based upon the prices at which
Sithe would sell to Alcan, structured to produce a net present value of
approximately $19.6 million. For 1995, the fee would be approximately
$3.05 million. The Company had argued for compensation, which assures
discounted rates to Alcan, with a net present value of $39 million. The
PSC did not authorize a fee in connection with Sithe's sale to Liberty.
On October 12, 1994, the Company filed an appeal in State Supreme
Court, Albany County, which states that the April 1994 PSC Order is a
violation of legal procedure and precedent and should be reversed. The
Company cannot predict the outcome of this proceeding, but will continue to
press its position vigorously. Notwithstanding the Company's strong
opposition to Sithe's ability to sell to a retail customer, and the level
of compensation involved, the decision to require compensation to utilities
for costs that would otherwise be stranded has established a precedent in
by-pass situations for some level of recovery of the Company's investment.
FERC ORDER 636
FERC Order 636 and PSC Competitive Opportunities Proceeding -
Gas. Portions of the natural gas industry have undergone significant
structural changes. A major milestone in this process occurred in November
1993 with the implementation of FERC Order 636. FERC Order 636 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 to arrange for transportation and gas storage
services. The flexibility provided to the Company by these changes should
enable it to protect its existing market and still expand its core and
non-core market offerings. With these expanded opportunities come
increased competition from gas marketers and other utilities.
Similar rate initiatives on competitively priced natural gas were
addressed in a generic investigation completed by the PSC in December 1994.
The PSC order in the proceeding significantly expands customer access to
competitive gas suppliers using a framework designed to "assure that (1)
local distribution companies ("LDCs") and new entrants can compete; (2)
customers benefit from increased choices and improved performance resulting
from a more competitive industry; and (3) core customers continue to
receive quality services at affordable rates." The Company intends to
respond by proposing a comprehensive restructuring of rates and services
designed to take advantage of the opportunities presented by this new
"open" environment.
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 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 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 March 31, 1995
against which Bonds may be issued was approximately $2.1 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 March 31, 1995 was approximately $1.3
billion.
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, Section 1(q); Section 1(r); Article Fourth, Section 6,
-------------------------------------------------------------
Section 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 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, Section 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, Section 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, Section 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, Section 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 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, Section 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, Section 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, Section 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, is also a
director of Marine Midland Bank.
DESCRIPTION OF NEW PREFERRED STOCK
The New Preferred Stock will be fully paid and
nonassessable. The Transfer Agent is The Bank of New York, Church
Street Station, New York, New York 10286. 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, 1994 (i) 3,400,000 shares of the Preferred Stock, $100
par value, were authorized and 2,376,000 shares were outstanding, (ii)
19,600,000 shares of the Preferred Stock, $25 par value, were
authorized and 12,774,005 shares were outstanding; (iii) 8,000,000
shares of Preference Stock, $25 par value, were authorized and no
shares were outstanding; and (iv) 185,000,000 shares of the Common
Stock, $1 par value, were authorized, and 144,311,466 shares were
outstanding. The Preferred Stock ranks 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 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, 1993 and 1994 and in the first
quarter of 1995, the Company paid annual cash dividends per share of
Common Stock of $0.32, $0.76, $0.95, $1.09 and $.28, respectively. On
April 13, 1995, the Board of Directors of the Company authorized a
common stock dividend of $.28 per share, which will be paid on May 31,
1995 to shareholders of record on May 1, 1995.
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 1995 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:
YEAR HIGH LOW
---- ---
1991
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
Second Quarter . . . . . . . . 19 14-5/8
Third Quarter . . . . . . . . . 17-1/2 12
Fourth Quarter . . . . . . . . 14-3/8 12-7/8
The book value of the Company's Common Stock at December 31,
1994 was $17.06 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 The
Bank of New York, Church Street Station, New York, New York 10286.
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.
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 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.
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, 1994 have been so incorporated in reliance on the
report (which contains two explanatory paragraphs, one 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 9 to the financial statements and one with respect to an indexing
proposal by representatives of the PSC and the effect of such proposal
on the continued applicability of SFAS No. 71, as described in Note 2
to the financial statements) of Price Waterhouse LLP, 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,
1995 and 1994, incorporated by reference in this Prospectus, the
Company's independent accountants, Price Waterhouse LLP, reported that
they have applied limited procedures in accordance with professional
standards for a review of such information. However, their separate
report dated May 8, 1995 states that they did not audit and they do
not express an opinion on that unaudited consolidated financial
information. Price Waterhouse LLP 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 LLP 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 LLP within the meaning of Sections 7 and
11 of the Act.
<PAGE>
==================================== ============================
No person has been authorized
to give any information or to make
any representations in connection
with this offering other than those $275,000,000
contained in this Prospectus
Supplement or the Prospectus and,
if given or made, such other
information and representations must NIAGARA MOHAWK
not be relied upon as having been POWER CORPORATION
authorized by the Company or the
Underwriters. Neither the delivery
of this Prospectus Supplement or
the Prospectus nor any sale made
hereunder shall, under any
circumstances, create any
implication that there has been no
change in the affairs of the
Company since the date hereof or
that the information contained
herein is correct as of any time
subsequent to its date. This
Prospectus Supplement and the
Prospectus do not constitute an
offer to sell or a solicitation
of an offer to buy any securities
other than the registered
securities to which they relate.
This Prospectus Supplement and the
Prospectus do not constitute an
offer to sell or a solicitation of FIRST MORTGAGE BONDS,
an offer to buy such securities in 7 3/4% SERIES DUE
any circumstances in which such MAY 15, 2006
offer or solicitation is unlawful.
---------------
TABLE OF CONTENTS NIAGARA
MOHAWK
Prospectus Supplement
PAGE ----------------
Consolidated Financial PROSPECTUS SUPPLEMENT
Information S-2
Significant Investment -----------------
Considerations S-3
Construction and Financing
Program S-4
Supplemental Description
of New Bonds S-6
Underwriting S-7
Legal Opinions S-8 PAINEWEBBER INCORPORATED
PROSPECTUS
Available Information 1 DONALDSON, LUFKIN & JENRETTE
Incorporation of Certain SECURITIES CORPORATION
Documents by Reference 1
The Company 2
Ratio of Earnings to Fixed
Charges 2 SALOMON BROTHERS
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividends 2
Application of Proceeds 3
Significant Factors and Recent
Developments 3
Description of New Bonds 18
Description of New Preferred
Stock 22 -----------------
Common Stock Dividend and
Price Range 24 May 16, 1995
Description of Additional
Common Stock 25
Plan of Distribution 27
Legal Opinions and Experts 28
==================================== ============================
