20,546,264 SHARES
NIAGARA MOHAWK POWER CORPORATION
COMMON STOCK PAR VALUE $1.00 PER SHARE
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All of the 20,546,264 shares of common stock, par value $1.00 per share
("Common Stock"), of Niagara Mohawk Power Corporation, a New York corporation
(the "Company"), being offered hereby are being sold by the shareholders of the
Company (the "Selling Shareholders"). The Company will not receive any proceeds
of the sale of shares of Common Stock by the Selling Shareholders. See "Selling
Shareholders."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS PRIOR TO ANY
INVESTMENT IN THE SHARES OFFERED HEREBY.
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.
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No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in or
incorporated by reference into this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company, the Underwriters or any other person. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to sell or the
solicitation of an offer to buy any security other than the shares offered
hereby, an offer to sell or a solicitation of an offer to buy the Shares by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so or to any person in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this 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 in this Prospectus is correct as of any time subsequent to
the date hereof.
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TABLE OF CONTENTS
Page
Prospectus Summary......................................................... 3
The Company................................................................ 3
Risk Factors............................................................... 6
Dividend Policy............................................................ 10
The MRA and the PowerChoice Agreement...................................... 11
The Share Exchange......................................................... 15
Selling Shareholders....................................................... 16
Plan of Distribution....................................................... 18
Validity of the Shares..................................................... 20
Experts.................................................................... 20
Available Information...................................................... 20
Incorporation of Certain Documents by Reference............................ 21
Glossary of Certain Electricity, Natural Gas and Accounting Terms.......... 22
June 30, 1998
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and the financial
statements, including the notes thereto, appearing elsewhere (or incorporated by
reference) in this Prospectus. Each prospective investor is encouraged to read
this Prospectus and the documents incorporated by reference herein and therein
in their entirety. See "Glossary of Certain Electricity, Natural Gas and
Accounting Terms" appearing as Appendix A for definitions of certain terms used
in this Prospectus.
THE COMPANY
Niagara Mohawk Power Corporation (the "Company") is engaged in the
generation, purchase, transmission, distribution and sale of electricity and the
purchase, distribution, sale and transportation of natural gas in New York
State. The Company provides electric service to its customers in areas of
central, northern and western New York having a total population of
approximately 3.5 million, including the cities of Buffalo, Syracuse, Albany,
Utica, Schenectady, Niagara Falls, Watertown and Troy. The Company sells,
distributes and transports natural gas in areas of central, northern and eastern
New York contained within the Company's electric service territory having a
total population of approximately 1.7 million. The Company owns or has a
significant ownership interest in seven principal fossil and nuclear electric
generating facilities and a total capacity of approximately 5,299 megawatts
("MW") of electricity.
In 1997, the Company entered into two related agreements that it
believes will significantly improve its financial outlook, namely the
PowerChoice Settlement Agreement dated October 10, 1997 (as modified by the PSC
Order (as defined), the "PowerChoice Agreement") and the Master Restructuring
Agreement dated July 9, 1997, as amended (the "MRA"). Pursuant to the
PowerChoice Agreement, the Company and the New York State Public Service
Commission (the "PSC"), which regulates utilities in the State of New York, have
agreed to a five-year rate plan and the Company has agreed to divest its fossil
and hydro generating facilities (the "Genco Divestiture"), representing 4,217 MW
of capacity and approximately $1.1 billion of net book value. The PSC issued a
written order approving the PowerChoice Agreement and the MRA on March 20, 1998
(the "PSC Order"). The Company currently intends to use the proceeds from any
Genco Divestiture to reduce indebtedness. Pursuant to the MRA, the Company and
14 independent power producers ("IPPs", and such 14 IPPs, the "IPP Parties")
agreed to terminate, restate or amend 27 power purchase agreements ("PPAs")
between the Company and such IPPs in exchange for cash and approximately 42.9
million shares of the Company's Common Stock. The Selling Shareholders are IPP
Parties. The MRA closed on June 30, 1998. The Company funded its cash
obligations under the MRA through the sale of $3.45 billion principal amount of
senior unsecured debt (the "Debt Offering"). In addition, the Company sold 22.4
million of the 42.9 million shares of Common Stock to the public (the "Equity
Offering", and together with the Debt Offering, the "MRA Financing"), and
delivered the proceeds thereof to the IPP Parties. The remaining 20.5 million
shares received by the IPP Parties are being registered hereunder. See "The MRA
and the PowerChoice Agreement."
For the twelve months ended March 31, 1998, the Company derived
approximately 84.5% of its revenues from the sale and transmission of
electricity and 15.5% of its revenues from the sale, distribution and
transportation of natural gas. During such period, the Company had revenues,
EBITDA, interest charges and net income of approximately $3.9 billion, $859.7
million, $272.0 million, and $100.7 million, respectively. After giving pro
forma effect to the consummation of the MRA and the MRA Financing, and the
principal terms of the PowerChoice Agreement excluding the Genco Divestiture,
the Company would
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have had revenues, EBITDA, interest charges and net loss of approximately $3.8
billion, $1.3 billion, $516.1 million, and $(35.2) million, respectively.
"EBITDA" represents earnings before interest charges, interest income, income
taxes, depreciation and amortization, non-cash regulatory deferrals and other
amortizations, and extraordinary items. EBITDA is presented to provide
additional information about the Company's ability to meet its future
requirements for debt service and capital expenditures. EBITDA should not be
considered an alternative to net income as an indicator of operating performance
or an alternative to cash flow as a measure of liquidity. See the Pro Forma
Condensed Statements of Income and the Consolidated Statements of Cash Flows
incorporated by reference in this Prospectus. See "The MRA and the PowerChoice
Agreement" and the "Pro Forma Condensed Financial Statements" set forth herein.
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.
BACKGROUND OF THE MRA
The Company entered into the PPAs that are subject to the MRA because
it was required to do so under the Public Utility Regulatory Policies Act of
1978 ("PURPA"), which was intended to provide incentives for businesses to
create alternative energy sources. Under PURPA, the Company was required to
purchase electricity generated by qualifying facilities of IPPs at prices that
were not expected to exceed the cost that otherwise would have been incurred by
the Company in generating its own electricity, or in purchasing it from other
sources (known as "avoided costs"). While PURPA was a federal initiative, each
state retained certain delegated authority over how PURPA would be implemented
within its borders. In its implementation of PURPA, the State of New York passed
the "Six-Cent Law," establishing 6(cent) per kilowatt hour ("Kwh") as the floor
on avoided costs for projects less than 80 MW in size. The Six-Cent Law remained
in place until it was amended in 1992 to deny the benefit of the statute to any
future PPAs. The avoided cost determinations under PURPA were periodically
increased by the PSC during this period. PURPA and the Six-Cent Law, in
combination with other factors, attracted large numbers of IPPs to New York
State, and, in particular, to the Company's service territory, due to the area's
existing energy infrastructure and availability of cogeneration hosts. The
pricing terms of substantially all of the PPAs that the Company entered into in
compliance with PURPA and the Six-Cent Law or other New York laws were based, at
the option of the IPP, either on administratively determined avoided costs or
minimum prices, both of which have consistently been materially higher than the
wholesale market prices for electricity.
Since PURPA and the Six-Cent Law were passed, the Company has been
required to purchase electricity from IPPs in quantities in excess of its own
demand and at prices in excess of those available to the Company by internal
generation or for purchase in the wholesale market. In fact, by 1991 the Company
was facing a potential obligation to purchase power from IPPs substantially in
excess of its peak demand of 6,093 MW. As a result, the Company's competitive
position and financial performance have deteriorated and the price of
electricity paid per Kwh by its customers has risen significantly above the
national average. Accordingly, in 1991 the Company initiated a parallel strategy
of negotiating individual PPA buyouts, cancellations and renegotiations, and of
pursuing regulatory and legislative support and litigation to mitigate the
Company's obligation under the PPAs. By mid-1996, this strategy had resulted in
reducing the Company's obligations to purchase power under its PPA portfolio to
approximately 2,700 MW. Notwithstanding this reduction in capacity, over the
same time period, the payments made to the IPPs in respect of their PPAs rose
from approximately $200 million in 1990 to approximately $1.1 billion in 1997 as
independent power facilities from which the Company was obligated to purchase
electricity commenced operations. The Company estimates that absent the MRA,
payments made to the IPPs pursuant to PPAs would continue to escalate by
approximately $50 million per year until 2002.
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Recognizing the competitive trends in the electric utility industry and
the impracticability of remedying the situation through a series of customer
rate increases, in mid-1996, the Company began comprehensive negotiations to
terminate, amend or restate a substantial portion of above-market PPAs in an
effort to mitigate the escalating cost of these PPAs as well as to prepare the
Company for a more competitive environment. These negotiations led to the MRA
and the PowerChoice Agreement. See "The MRA and the PowerChoice Agreement."
BUSINESS STRATEGY
In New York State, where the Company's principal assets are located,
the PSC has established guidelines and goals for the development of a
competitive electricity market through the Competitive Opportunities Proceeding.
The PSC's stated goals include (i) lowering customer rates; (ii) increasing
customer choice; (iii) maintaining reliability of service; (iv) continuing
environmental and public policy programs; (v) mitigating concerns about market
power; and (vi) continuing customer protections and the obligation to serve. In
addition, the PSC has stated that electric utilities may recover stranded costs
from customers through a non-bypassable "wires" charge, known as a Competitive
Transition Charge ("CTC"), to be collected by electric distribution companies.
Stranded costs are utility costs that cannot be fully recovered from customers
in rates established in a competitive market. However, the PSC also cautioned
that a careful balancing of customer and electric utility interests and
expectations is necessary, and that the level of stranded cost recovery will
ultimately depend on the particular circumstances of each electric utility. Six
of the seven investor-owned electric utilities in New York State have had major
restructuring proposals approved, including the Company's PowerChoice Agreement.
Management believes that the MRA and the PowerChoice Agreement provide
the Company with financial stability and create an improved platform from which
to build value. The primary objective of the MRA is to convert a large and
growing off-balance sheet payment obligation that threatens the financial
viability of the Company into a fixed and manageable capital obligation.
Accordingly, the Company believes that the lower contractual obligations
resulting from the MRA will significantly improve cash flow which can be
dedicated to reduce indebtedness incurred to fund the MRA. With the PowerChoice
Agreement, the Company has established lower prices for its industrial,
commercial and residential electric customers for a period of three years and
reasonable certainty of prices for the two years thereafter. The MRA also
facilitates the creation of a competitive electricity supply market in the
Company's service territory.
In the near term, the Company believes the greatest opportunity for
improving the cash flow and financial condition of the Company will come from
focusing on the regulated electric transmission, distribution, nuclear and gas
operations. The Company will continue to emphasize operational excellence and
seek to improve margins through cost reductions. In addition, the Company
intends to pursue low risk unregulated business opportunities. Pursuant to the
PowerChoice Agreement, the Company has a one-year window in which to form a
holding company that, if formed, would enhance the Company's ability to explore
unregulated business opportunities to foster longer-term strategic growth. The
Company has obtained approval from its shareholders for the formation of a
holding company. The implementation of a holding company will only occur
following various regulatory approvals and is not expected to occur prior to the
first quarter of 1999. See "The Share Exchanges."
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RISK FACTORS
This Prospectus contains or incorporates by reference statements that
constitute forward looking information within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements regarding the Company's
future financial condition, results of operations, cash flows, financing plans,
business strategy, projected costs and capital expenditures, operations under
the MRA and the PowerChoice Agreement and words such as "anticipate,"
"estimate," "expect," "project," "intend," and similar expressions are intended
to identify forward-looking statements. Such statements appear in this
Prospectus under the captions "Prospectus Summary," "Risk Factors," and "The MRA
and the PowerChoice Agreement." Such statements are subject to certain risks,
uncertainties and assumptions. All of these forward-looking statements are based
on estimates and assumptions made by the Company's management which, although
believed by the Company's management to be reasonable, are inherently uncertain.
Investors are cautioned that such forward-looking statements are not guarantees
of future performance or results and involve risks and uncertainties and that
actual results or developments may differ materially from the forward-looking
statements as a result of various factors, including the factors described
below.
EFFECT OF MRA AND POWERCHOICE ON THE COMPANY'S REPORTED EARNINGS
The Company's reported net income will be significantly depressed in
the future as compared to historical results because of the effects of the MRA
and the PowerChoice Agreement. Pursuant to the rate reductions under
PowerChoice, the Company's electric revenues will be reduced by approximately
$111.8 million to be phased in over three years. In addition, the compensation
paid to the IPP Parties in the form of cash and Common Stock will be capitalized
and carried on the Company's books as a regulatory asset in an amount of
approximately $4.0 billion (the "MRA Regulatory Asset"). This asset will be
amortized generally over ten years and will substantially reduce the Company's
reported earnings. Finally, the estimated additional interest charges and
amortization of debt issuance costs associated with the Debt Offering will
increase the Company's future interest expense and correspondingly reduce
earnings. The impact of reduced revenues under the PowerChoice Agreement, the
MRA Regulatory Asset and the increased interest expense related to the Debt
Offering will be partially offset by the benefit to the Company of the decreased
cost of electricity purchased from the IPPs. On a pro forma basis, as a result
of the above adjustments, the Company's net income (loss) will be reduced by
$135.1 million and $136.1 million for the year ended December 31, 1997 and the
twelve months ended March 31, 1998, respectively, to $48.2 million and $(35.4)
million, respectively, for such periods. On a historical basis, the Company
reported net income of $183.3 million and $100.7 million, respectively, for such
periods. The foregoing may adversely affect the market for the Common Stock and
the prices at which it may trade.
SUBSTANTIAL LEVERAGE AND LIMITED FINANCIAL FLEXIBILITY
As a result of the MRA and the Debt Offering, the Company has
substantial leverage and significant debt service obligations. As of March 31,
1998, on a pro forma basis after giving effect to the consummation of the MRA
and the Debt Offering, the Company would have had outstanding approximately $6.8
billion of senior indebtedness, consisting primarily of $2.8 billion of First
Mortgage Bonds, which are secured by a lien on substantially all of the
Company's utility property, $529.0 million of borrowings under the Company's
senior bank facility, which are secured with First Mortgage Bonds, $20.0 million
of unsecured medium term notes and $3.279 billion of senior unsecured notes (the
"Notes"). The Company also has available additional borrowings of $275.0 million
under its senior bank facility and, under the financial covenants set forth in
the indenture governing the Notes, as of the date hereof, has the ability to
incur an additional $1.5 billion of indebtedness. See "The MRA and the
PowerChoice Agreement."
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The degree to which the Company is leveraged could have important
consequences to holders of the Common Stock, including: (i) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or other corporate purposes will be limited in the
future; (ii) a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for other purposes; and
(iii) the Company's substantial leverage may place the Company at a competitive
disadvantage, hinder its ability to adjust rapidly to changing market conditions
and make it more vulnerable in the event of a downturn in general economic
conditions or its business.
EFFECT OF DECREASED SALES TO CUSTOMERS
Under the PowerChoice Agreement, the Company has established rates
intended to create sufficient cash flow to at least cover its operating
expenses, satisfy its fixed obligations, and recover allowable stranded costs.
The Company's rate design is based on estimates of future electricity usage and
the number of customers connected to the Company's distribution system. The
level of electric revenues can be adversely affected by lower than projected
sales to retail customers and by customer bypass of the system. Economic
conditions in the Company's service area could result in lower sales due to the
relocation of customers. Because of the relatively high cost of the Company's
electricity, customers could seek to bypass the Company's distribution system
through self-generation or the replacement of the Company with a municipal or
other utility. While the PowerChoice Agreement requires the payment of an exit
fee or access charge in these circumstances (except with respect to customers
who had made substantial investment in on-site generation as of October 10,
1997), the affected customers and competitors may challenge the Company's right
to collect these fees, or the appropriate level of these fees. There can be no
assurance that the Company would prevail in any such proceeding. If revenues are
significantly lower than those anticipated in its rate design, the Company's
profitability could be materially adversely affected.
REGULATORY MATTERS
Following implementation of the PowerChoice Agreement, the Company will
remain subject to extensive regulation by the PSC. While the most material
aspects of the Company's rate structure for the next five years are established
in the PowerChoice Agreement, under certain circumstances, the PSC could
initiate proceedings to reduce rates. Conversely, the PSC is likely to continue
to assess competitive consequences in considering future rate increases even in
the event that the Company experiences revenue shortfalls or increased expenses.
In addition, many aspects of the Company's operations, including its electric
transmission and distribution systems, the operation and maintenance of its
nuclear facilities, its gas distribution operations and the issuance of
securities, will continue to be subject to extensive regulation by both the
federal government and the PSC. Changes in these regulations or in their
application to the Company could adversely affect the Company's business and
financial condition. Further, uncertainty exists regarding the ultimate impact
on the Company as the electric industry is further deregulated and electricity
suppliers gain open access to the Company's retail customers.
New York laws governing the approval of the PowerChoice Agreement
provide various parties the right to appeal such approval by giving notice of
their intention to do so within four months of the date on which approval is
received. Such an appeal may be based on the failure of the record to show a
reasonable basis for the terms of the PowerChoice Agreement and may result in an
amendment of the record to correct such failure, in renegotiation of such terms
or in renegotiation of the PowerChoice Agreement as a whole. There can be no
assurance that, if appealed, the approval of the PowerChoice Agreement will be
upheld or that such appeal will not result in terms substantially less favorable
to the Company than those described
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herein. Certain parties have filed petitions for rehearing before the PSC. Of
the six petitions filed, three have been denied. In addition, certain parties
and filed an action seeking to enjoin the implementation of the PowerChoice
Agreement, the MRA and the Company's contemplated Genco Divestiture on the
grounds that the PSC failed to comply with the provisions of the New York State
Environmental Quality Review Act. On April 20, 1998, the application for a
temporary restraining order was denied, and on May 22, 1998, the injunction was
denied and the petition was dismissed, which decision is appealable. The Company
is unable to predict the outcome of any such proceeding. Suspension of the
PowerChoice Agreement or renegotiation of its material terms could have a
material adverse effect on the Company's results of operations.
RESTRICTIONS ON THE ABILITY TO PAY DIVIDENDS
The Company's Board of Directors omitted the Common Stock dividend
beginning in 1996 in order to stabilize the Company's financial condition and to
provide additional cash to service its fixed obligations. The Company expects to
dedicate a substantial portion of its future cash flow to reduce the
indebtedness incurred in connection with the MRA, which will reduce the amount
of cash available to pay dividends on the Common Stock. In addition, the
PowerChoice Agreement, as well as the indenture governing the Notes and the
Company's senior bank facility, significantly limit the amount that the Company
is permitted to pay in dividends on its Common Stock and Preferred Stock. In
light of the foregoing, there can be no assurance that the Company will be in a
position to pay dividends on the Common Stock in the near future and, if such
dividends are paid, their amount may be limited based on the Board's evaluation
of the Company's financial condition, business conditions and other factors at
the time.
FEDERAL INCOME TAX IMPLICATIONS OF MRA TO THE COMPANY
The Company has requested rulings from the Internal Revenue Service to
the effect that the amount of cash and Common Stock paid to the IPP Parties who
are terminating their PPAs upon closing of the MRA will be currently deductible
and generate a substantial net operating loss ("NOL"). No assurance can be given
that favorable rulings will be issued. If favorable rulings are not received,
and the Company's claimed current deductions are challenged on audit and not
ultimately sustained, the amount of tax refunds generated from the NOL
carryback, and thus the amount of cash available to provide operating capital
and service the Company's obligations following consummation of the MRA, would
be reduced. While any disallowed deductions would ultimately be allowable in
future years, and would likely create, or increase the amount of NOLs available
to offset tax liabilities in future years, cash flow would be adversely affected
in the near term.
The Company's ability to utilize the NOL generated as a result of the
MRA could be substantially limited under the rules of section 382 of the
Internal Revenue Code (the "Code") if certain changes in the Company's stock
ownership were to occur following the consummation of the MRA. In general, the
limitation is triggered by a more than 50% change in stock ownership during a
3-year testing period by shareholders who own, directly or indirectly, 5% or
more of the Common Stock. For purposes of making the change in ownership
computation, the IPP Parties who are issued Common Stock pursuant to the MRA and
the purchasers in the Equity Offering will likely be considered separate 5%
shareholder groups, with the result that a stock ownership change of up to 23%
will be deemed to have occurred by reason of their collective acquisition of
such stock. Thus, if the IPP Parties, the purchasers in the Equity Offering and
any other 5% shareholders experience ownership increases totaling more than 27%
during any 3-year testing period that includes the consummation date of the MRA,
the 50% statutory threshold would be breached and the NOL limitation would
apply. The rules for determining changes in stock ownership for purposes of
section 382 are extremely complicated and in many respects uncertain. A stock
ownership change could
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occur as a result of circumstances that are not within the control of the
Company. If a more than 50% change in ownership were to occur, the Company's
remaining usable NOL on a going forward basis would likely be significantly
lower than the NOL amount which otherwise would be usable absent the limitation.
Consequently, the Company's net cash position could be significantly lower as a
result of tax liabilities which would otherwise be eliminated or reduced through
unrestricted use of the NOL.
NUCLEAR FACILITY RISK
Risks of substantial liability arise from the ownership and operation
of nuclear facilities, including, among others, structural problems at a nuclear
facility, the storage, handling and disposal of radioactive materials,
limitations on the amounts and types of insurance coverages commercially
available and uncertainties with respect to the technological and financial
aspects of decommissioning nuclear facilities at the end of their useful lives.
The Company's Nine Mile Point Nuclear Unit No. 1 ("Unit 1") nuclear facility is
one of the oldest in operation, having commenced operations in 1969. In the
event of an extended outage of either Unit 1 or Unit 2 at Nine Mile Point, the
Company would be required to purchase power in the open market to replace the
power normally produced by these facilities. Such purchases would subject the
Company to the risk of increased energy prices and, depending on the length of
the outage and the level of market prices, could have a material adverse effect
on the Company's cash flow. Under the PowerChoice Agreement, the Company is not
entitled to pass along these increased costs to customers in the form of higher
electric rates. If either facility were to have problems with its physical
condition or require significant capital expenditure, the Company would evaluate
the economic justification of continuing to operate the facility. The prudence
of the Company's decision to close a facility is subject to review by the PSC to
determine whether the Company should be allowed to recover its incremental
costs, including replacement power costs, which would likely be an amount
significant to the Company.
ENVIRONMENTAL REGULATIONS
The Company and its operations are subject to a wide range of
environmental laws and regulations relating to, among other matters, air
emissions, wastewater discharges, landfill operations and hazardous waste
management. Compliance with these laws and regulations is an increasingly
important factor in the Company's business. The Company is 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 also been advised that various federal, state or local agencies believe
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 124 such sites with
which it has been or may be associated, including 76 which are Company-owned.
With respect to non-owned sites, the Company may be required to contribute some
share of the remedial costs. The Company has denied any responsibility in
certain of these sites and is contesting liability accordingly. Although in
practice, remedial costs are often allocated among parties, one party can, as a
matter of law, be held liable for all of the remedial costs at a site regardless
of fault. The Company has accrued a liability in the amount of $220 million for
remedial costs and the high end of the range of remedial costs is currently
estimated by the Company to be approximately $650 million, including
approximately $285 million in the unlikely event the Company is required to
assume 100% responsibility at non-owned sites. The Company believes that it is
probable that environmental compliance and remediation costs will continue to be
recovered in its rates and the Company has recorded a regulatory asset for
recovery of these costs. However, there can be no assurance that additional
expenses associated with remedial costs or compliance with
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proposed and future environmental laws and regulations could not have a material
adverse effect on the future operations and financial condition of the Company.
ACCOUNTING PRINCIPLES
The Company continues to apply the accounting principles of SFAS No. 71
to its electric transmission and distribution, nuclear and gas operations, based
on the terms of the PowerChoice Agreement. SFAS No. 71 permits a utility to
defer certain costs for future recovery which would otherwise be charged to
expense when authorized to do so by the relevant regulatory authorities. As of
March 31, 1998, the Company had recorded $811.0 million of regulatory assets,
net of regulatory liabilities, associated with the electric business. The
deferral of the costs of the MRA by the PSC will cause the net regulatory assets
to increase by approximately $4.0 billion. In the event that the Company
determined, either as a result of lower than expected revenues or higher than
expected costs, that its net regulatory assets were not in fact recoverable, it
could no longer apply the principles of SFAS No. 71 and would be required to
record a non-cash charge against income in the amount of the remaining
unamortized net regulatory assets.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on the Common
Stock since 1996. The Company currently intends to retain future earnings to
repay indebtedness and therefore, does not anticipate paying any cash dividends
in the immediate future. The Company is limited in its ability to pay cash
dividends in respect of its Common Stock pursuant to the PowerChoice Agreement,
the indenture governing the Notes and the Company's senior bank facility. Any
future determination to declare and pay dividends will be made by the Board of
Directors after evaluating the Company's earnings, cash flow, financial
position, capital requirements, contractual agreements, regulatory restrictions,
competitive position, and such other factors as the Board of Directors deems
relevant.
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THE MRA AND THE POWERCHOICE AGREEMENT
Overview
On March 20, 1998, the Company received written approval from the PSC
for the PowerChoice Agreement which establishes a five-year rate plan and
incorporates the terms of the MRA. The key terms of the PowerChoice Agreement
include: (i) a revenue reduction of $111.8 million (exclusive of reductions in
the New York State Gross Receipts Tax) for all customer classes to be phased in
over three years beginning upon the consummation of the MRA; (ii) a mechanism to
cap prices to electric customers in years four and five of the five-year term;
(iii) an allowance for the Company to recover stranded costs (including the
recoverable costs associated with the MRA); (iv) the permission to establish the
MRA Regulatory Asset, reflecting the recoverable costs of the MRA which will be
amortized generally over ten years; (v) an agreement by the Company to divest
its fossil and hydro electric generating facilities within a defined time period
and retain its nuclear generating facilities with a commitment to explore their
divestiture at a later date; and (vi) an agreement by the Company to provide its
retail electric customers with the option to choose their supplier of
electricity by no later than December 1999.
The MRA
The closing of the MRA Financing closed concurrently with the closing
of the MRA. Pursuant to the MRA, the Company reached an agreement with 14 IPPs
to terminate, restate or amend 27 PPAs in exchange for approximately $3.6
billion of cash and approximately 42.9 million shares of Common Stock
(representing approximately 23% of the Company's outstanding shares following
such issuance). Approximately 22.4 million shares of Common Stock were issued in
the Equity Offering and the net proceeds thereof were paid to the IPP Parties.
The remainder of the 42.9 million shares of Common Stock was issued directly to
the IPP Parties and is being registered hereunder. The proceeds of the Debt
Offering, together with cash on hand, were used to fund the Company's cash
obligation under the MRA. The principal effects of the MRA are to significantly
reduce the Company's existing payment obligations under the PPAs, which
consisted of approximately 2,700 MW of capacity in aggregate for all existing
PPAs at March 31, 1998.
The Company expects that the MRA will result in a significant
improvement in cash flow resulting from the reduction in the payment obligation
(both in nominal dollars and PPA duration) under the existing PPAs. The savings
in annual energy payments will yield significant free cash flow that can be
dedicated to the repayment of the Notes.
Under the terms of the MRA, the Company's significant long-term and
escalating IPP payment obligations have been restructured into a more manageable
debt obligation and a portfolio of restated and amended PPAs with price and
duration terms that the Company believes are more favorable than the existing
PPAs. Under the MRA, 18 PPAs representing approximately 1,100 MW of electric
generating capacity have been terminated completely, thus allowing this capacity
to be replaced through the competitive market at market-based prices. The
Company has no continuing obligation to purchase energy from the terminating
IPPs. Also under the MRA, eight PPAs representing approximately 541 MW of
capacity have been restated on economic terms and conditions which the Company
believes are more favorable to it than the terms of the existing PPAs subject to
the MRA. The restated PPAs have shorter terms (ten years) and have been
structured as financial swap contracts where the Company receives or makes
payments to the IPP Parties based upon the differential between the contract
price and a market reference price for electricity. The contract prices are
fixed for the first two years changing to an indexed pricing formula thereafter.
Contract quantities are fixed for the full ten year term of the contracts. The
indexed pricing structure ensures that the
11
<PAGE>
price paid for energy and capacity will fluctuate relative to the underlying
market cost of gas and general indices of inflation. Until such time as a
competitive energy market structure becomes operational in the State of New
York, the amended and restated contracts provide the IPP Parties with a put
option for the physical delivery of energy. Additionally, one PPA representing
42 MW of capacity will be amended to reflect a shorter term (17 years) and a
lower stream of fixed unit prices. The Company's expected future commitment
under the restated and amended contracts ranges from approximately $210 million
in the first year to $290 million in the tenth year.
Against the Company's forecast of market energy prices, the amended and
restated PPAs represent an expected above-market payment obligation. The Company
believes, however, that its portfolio of amended and restated PPAs could provide
it and its customers with a hedge against significant upward movement in market
prices for electricity. The portfolio of amended and restated PPAs and market
purchases contain terms that are more responsive than the existing PPAs to
competitive market price changes.
The IPP Parties and their designees own approximately 20.5 million
shares of the Common Stock, representing approximately 11% of the Company's
voting securities. Pursuant to the MRA, any IPP Party that received 2% or more
of the outstanding Common Stock and any designee of IPP Parties that received
more than 4.9% of the outstanding Common Stock upon the consummation of the MRA,
together with certain but not all affiliates (collectively, "2% Shareholders"),
entered into certain shareholder agreements (the "Shareholders Agreements").
Pursuant to each Shareholder Agreement, the 2% Shareholders agree that for five
years from the consummation of the MRA they will not acquire more than an
additional 5% of the outstanding Common Stock (resulting in ownership in all
cases of no more than 9.9%) or take any actions to attempt to acquire control of
the Company, other than certain permitted actions in response to unsolicited
actions by third parties. The 2% Shareholders generally vote their shares on a
"pass-through" basis, in the same proportion as all shares held by other
shareholders are voted, except that they may vote in their discretion (i) for
extraordinary transactions and (ii) for directors when there is a pending
proposal to acquire the Company. Purchasers of the shares offered hereby who are
not affiliates of any 2% Shareholders will not be subject to the above described
restrictions.
Each of the IPP Parties that owns shares of Common Stock being
registered hereunder has agreed, until 45 days after the closing of the Equity
Offering, not to offer, sell or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock, or enter into any swap or similar
arrangement with respect thereto, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, subject to certain
exceptions.
The PowerChoice Agreement
The PowerChoice Agreement, which was approved by the PSC on March 20,
1998, establishes a five-year rate plan that will reduce average residential and
commercial rates by an aggregate of 3.2% over the first three years. The rate
plan will take effect within 30 days of approval by the PSC of the tariffs
implementing PowerChoice, but in no case earlier than the MRA closing. The
reduction in prices will include certain savings that will result from partial
reductions of the GRT. Industrial customers will see average reductions of 25%
relative to 1995 price levels; these decreases will include discounts currently
offered to some industrial customers through optional and flexible rate
programs. The cumulative rate reductions, exclusive of GRT savings, are
estimated to be $111.8 million, to be phased in over the first three years of
the agreement. During the term of the PowerChoice Agreement, the Company will be
permitted to defer certain costs associated primarily with environmental
remediation, nuclear decommissioning and related costs, and changes in laws,
regulations, rules and orders. The Company must also defer, during the term of
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<PAGE>
the PowerChoice Agreement, the difference between the assumed weighted average
interest rate of 8.5% used by the Company to prepare its PowerChoice proposal
and the actual weighted average interest rate for the Senior Notes portion of
the Debt Offering. In years four and five of its rate plan, the Company can
request an annual increase in prices subject to a cap of 1% of the all-in price,
excluding commodity costs (e.g., transmission, distribution, nuclear, and
forecasted CTC). In addition to the price cap, the PowerChoice Agreement
provides for the recovery of deferrals established in years one through four and
cost variations resulting from indexing provisions of the MRA financial
contracts. The aggregate of the price cap increase and recovery of deferrals is
subject to an overall limitation of inflation.
Under the terms of the PowerChoice Agreement, all of the Company's
customers will be able to choose their electricity supplier in a competitive
market by December 1999. The Company will continue to distribute electricity
through its transmission and distribution systems and would be obligated to be
the so-called provider of last resort for those customers who do not exercise
their right to choose a new electricity supplier.
The PowerChoice Agreement provides that the MRA and the contracts
executed pursuant thereto are found to be prudent. The PowerChoice Agreement
further provides that the Company shall have a reasonable opportunity to recover
its stranded costs, including those associated with the MRA and the contracts
executed thereto, through a CTC and, under certain circumstances, through exit
fees or in rates for back-up service.
The PSC has limited the amount of the MRA Regulatory Asset that can be
recovered from customers to approximately $4.0 billion. The MRA Regulatory Asset
represents the recoverable costs of the MRA, consisting of the cash compensation
paid to the IPP Parties, the issuance of approximately 42.9 million shares of
Common Stock, of which 22.4 million shares were issued in the Equity Offering
with the remaining 20.5 million shares being registered hereunder, and other
expenses related to the MRA. The value of the limitation on the recoverability
of the MRA Regulatory Asset is expected to be recorded as a $263.2 million
charge to expense in the second quarter of 1998.
The PowerChoice Agreement calls for the Company to divest all its
fossil and hydro generating facilities and prohibits the Company from owning
non-nuclear generating assets within the State of New York except as described
below. The Genco Divestiture is intended to be accomplished through an auction,
the plan for which was approved by the PSC in an order dated May 6, 1998.
Winning bids are expected to be selected in the fall of 1998. The Company will
retain a portion of the auction sale proceeds, above specified levels, as an
incentive to obtain maximum value in the sale. This incentive would be recovered
from sale proceeds. The Company agreed that if it does not receive an acceptable
bid for an asset, the Company will form a subsidiary to hold any such asset and
then will legally separate this subsidiary from the Company through a spin-off
to shareholders or otherwise. If a bid of zero or below is received for an
asset, the Company may keep the asset as part of its regulated business. The
auction process will serve to quantify any stranded costs associated with the
Company's fossil and hydro generating facilities. The Company will have a
reasonable opportunity to recover these costs through the CTC and, under certain
circumstances, through exit fees or in rates for back-up service. The Company
intends to use any cash proceeds from such an auction to repay indebtedness.
The PowerChoice Agreement contemplates that the Company's nuclear
plants will remain part of the Company's regulated business. The Company has
been supportive of the creation of a statewide New York Nuclear Operating
Company that it expects would improve the efficiency of nuclear units throughout
the state. The PowerChoice Agreement stipulates that absent such a statewide
solution, the Company will
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<PAGE>
file a detailed plan for analyzing other proposals regarding its nuclear
facilities, including the feasibility of an auction, transfer and/or divestiture
of such facilities, within 24 months of approval of the PowerChoice Agreement.
The PowerChoice Agreement also allows the Company to form a holding
company at its election. The Company obtained approval from its shareholders for
the formation of a holding company. The implementation of a holding company
structure will only occur following various regulatory approvals and is not
anticipated to occur prior to the first quarter of 1999.
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<PAGE>
THE SHARE EXCHANGE
EXCHANGE AGREEMENT
In order to effectuate a holding company structure, the Company will
engage in a share exchange (the "Share Exchange") whereby: (i) each share of the
Company's Common Stock outstanding immediately prior to the effective time of
the Share Exchange will be exchanged for one new share of common stock of the
holding company ("Holdings"); (ii) Holdings will become the owner of all
outstanding Common Stock of the Company; and (iii) the shares of Holdings common
stock held by the Company immediately prior to the Share Exchange will be
canceled.
As a result, upon completion of the Share Exchange, Holdings will
become a holding company, the Company will become a subsidiary of Holdings, and
all of Holdings common stock outstanding immediately after the Share Exchange
will be owned by the former holders of the Company's Common Stock outstanding
immediately prior to the share exchange. Following the Share Exchange, certain
of the Company's existing non-utility subsidiaries will be transferred to
Holdings and become subsidiaries of Holdings.
The Company's outstanding preferred stock will not be exchanged in the
Share Exchange but will continue as shares of the Company preferred stock. The
Share Exchange will not change the rights of the holders of such shares as
currently provided in the Company's Amended Certificate of Incorporation. Debt
of the Company will remain unchanged and will continue as outstanding
obligations of the Company after the Share Exchange.
CONDITIONS TO EFFECTIVENESS OF THE SHARE EXCHANGE
The Share Exchange is subject to the satisfaction of the following
conditions: (i) all necessary orders, authorizations, approvals or waivers from
the PSC and all other jurisdictive regulatory bodies, boards or agencies have
been received, remain in full force and effect, and do not include, in the sole
judgment of the Board of Directors of the Company, unacceptable conditions; and
(ii) shares of Holdings common stock to be issued in connection with the
exchange have been listed, subject to official notice of issuance, by the New
York Stock Exchange.
Following satisfaction of these conditions, the Share Exchange will
become effective immediately following the close of business on the date of
filing with the New York Department of State of a certificate of exchange
pursuant to Section 913(d) of the New York Business Corporation Law. The Company
cannot predict when all conditions will be satisfied, but expects that the share
exchange will become effective in the first quarter of calendar 1999.
LISTING OF HOLDINGS COMMON STOCK
Holdings is applying to have its common stock listed on the New York
Stock Exchange. It is expected that such listing will become effective at the
effective time of the Share Exchange. The stock exchange ticker symbol of
Holdings common stock will be "NMK", and quotations will be carried in
newspapers as they have been for the Company's Common Stock. Following the Share
Exchange, the Company's Common Stock will no longer trade and will be delisted
and no longer registered pursuant to Section 12 of the Securities Exchange Act
of 1934.
15
<PAGE>
SELLING SHAREHOLDERS
The table below sets forth the expected beneficial ownership of Common
Stock by each Selling Shareholder at June 30, 1998 and following the sale of the
shares of Common Stock offered by such Selling Shareholder. The Selling
Shareholders are IPP Parties or designees of IPP Parties and all of the shares
of Common Stock to be sold by the Selling Shareholders represent shares issued
to them in connection with the closing of the MRA.
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock to be
Beneficially Owned Before Beneficially Owned After Sale
Sale Under this Prospectus Under this Prospectus (1) (2)
(1) (2)
Shares to
Name of Selling Shareholder Number Percentage be sold Number Percentage
--------------------------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Onondaga Cogeneration Limited 1,292,801 (3) 1,292,801 0 --
Partnership
c/o GPU International, Inc.
One Upper Pond Road
Parsippany, NJ 07054
Indeck-Ilion Limited Partnership 4,763,874(4) 2.54% 4,763,874(4) 0 --
Indeck Energy Services, Inc.
600 North Buffalo Grove Road
Buffalo Grove, IL 60089
Indeck-Yerkes Limited Partnership 4,763,874(4) 2.54% 4,763,874(4) 0 --
Indeck Energy Services, Inc.
600 North Buffalo Grove Road
Buffalo Grove, IL 60089
Indeck-Olean Limited Partnership 4,763,874(4) 2.54% 4,763,874(4) 0 --
Indeck Energy Services, Inc.
600 North Buffalo Grove Road
Buffalo Grove, IL 60089
Indeck-Oswego Limited Partnership 4,763,874(4) 2.54% 4,763,874(4) 0 --
Indeck Energy Services, Inc.
600 North Buffalo Grove Road
Buffalo Grove, IL 60089
Jones Capital Corporation 400,000 (3) 400,000 0 --
J.A. Jones Drive
Charlotte, NC 28287
Energy Investors Fund, L.P. 420,581 (3) 420,581 0 --
200 Berkeley Street
20th Floor
Boston, MA 02116
Iroquois Power 391,593 (3) 391,593 0 --
c/o Clements & Duchame, P.C.
2 Judson Street
Canton, NY 10017
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Energy Factors, Incorporated 7,787,306(5) 4.16% 7,680,206(6) 107,100(7) (3)
450 Lexington Avenue
37th Floor
New York, NY 10017
Energy Corporation of America 187,035 (3) 187,035 0 --
4643
South Ulster Street
Suite 1100
Denver, CO 80237-2867
Sithe Energies, Inc. 7,787,306(5) 4.16% 7,680,206(6) 107,100(7) (3)
450 Lexington Avenue
37th Floor
New York, NY 10017
Sithe Energies U.S.A., Inc. 7,787,306(5) 4.16% 7,680,206(6) 107,100(7) (3)
450 Lexington Avenue
37th Floor
New York, NY 10017
Sundance Energy, Ltd. 494,404 (3) 494,404 0 --
380 Cemetery Road
Oswego, NY 13126
Beta Carthage, Inc. 4,615,771(8) 2.46% 4,615,770(9) 1(10) (3)
1151 Flatbush Road
Kingston, NY 12401
Beta C&S Limited 4,615,771(8) 2.46% 4,615,770(9) 1(10) (3)
1151 Flatbush Road
Kingston, NY 12401
Beta South Glens Falls, Inc. 4,615,771(8) 2.46% 4,615,770(9) 1(10) (3)
1151 Flatbush Road
Kingston, NY 12401
Beta Natural Dam, Inc. 4,615,771(8) 2.46% 4,615,770(9) 1(10) (3)
1151 Flatbush Road
Kingston, NY 12401
Beta N Limited 4,615,771(8) 2.46% 4,615,770(9) 1(10) (3)
1151 Flatbush Road
Kingston, NY 12401
Beta Syracuse, Inc. 4,615,771(8) 2.46% 4,615,770(9) 1(10) (3)
1151 Flatbush Road
Kingston, NY 12401
Beta Beaver Falls, Inc 4,615,771(8) 2.46% 4,615,770(9) 1(10) (3)
1151 Flatbush Road
Kingston, NY 12401
Harold N. Kamine 300,000 (3) 300,000 0 --
c/o Kamine Development Corp.
1535 Rt. 206
Suite 300
Bedminster, NJ 07921-2567
<PAGE>
<FN>
- ------------
(1) Based on the number of shares of Common Stock outstanding on June 30, 1998.
Beneficial ownership is determined in accordance with rules of the
Commission and includes shares over which the indicated beneficial owner
exercises voting and/or investment power.
(2) Each IPP Party that holds 2% or more of the outstanding Common Stock and
any designee of IPP Parties that holds more than 4.9% of the outstanding
Common Stock upon the consummation of the MRA, together with certain but
not all affiliates (collectively, "2% Shareholders"), entered into certain
shareholder agreements (the "Shareholders Agreements"). Pursuant to each
Shareholder Agreement, the 2% Shareholders agree that for five years from
the consummation of the MRA they will not acquire more than an additional
5% of the outstanding Common Stock (resulting in ownership in all cases of
no more than 9.9%) or take any actions to attempt to acquire control of the
Company, other than certain permitted actions in response to unsolicited
actions by third parties. The 2% Shareholders generally vote their shares
on a "pass-through" basis, in the same proportion as all shares held by
other shareholders are voted, except that they may vote in their discretion
(i) for extraordinary transactions and (ii) for directors when there is a
pending proposal to acquire the Company.
(3) Less than 1%.
(4) Includes (i) 1,463,505 shares held by Indeck-Ilion Limited Partnership,
(ii) 1,116,806 shares held by Indeck-Yerkes Limited Partnership, (iii)
1,993,911 shares held by Indeck-Olean Limited Partnership, and (iv) 189,652
shares held by Indeck-Oswego Limited Partnership.
(5) Includes (i) 4,350,569 shares held by Energy Factors, Incorporated, (ii)
1,683,311 shares held by Sithe Energies U.S.A., Inc. and (ii) 1,753,426
shares held by Sithe Energies, Inc.
(6) Includes (i) 4,350,569 shares held by Energy Factors, Incorporated, (ii)
1,683,311 shares held by Sithe Energies U.S.A., Inc. and (iii) 1,646,326
shares held by Sithe Energies, Inc.
(7) Includes 107,100 shares held by Sithe Energies, Inc.
(8) Includes (i) 611,801 shares held by Beta Carthage, Inc., (ii) 217,625
shares held by Beta C&S Limited, (iii) 621,409 shares held by Beta South
Glens Falls, Inc., (iv) 380,948 shares held by Beta Natural Dam, Inc., (v)
526,071 shares held by Beta N Limited, (vi) 894,934 shares held by Beta
Syracuse, Inc., (vii) 1,362,982 shares held by Beta Beaver Falls, Inc., and
(viii) 1 share held by Besicorp Group Inc.
(9) Includes (i) 611,801 shares held by Beta Carthage, Inc., (ii) 217,625
shares held by Beta C&S Limited, (iii) 621,409 shares held by Beta South
Glens Falls, Inc., (iv) 380,948 shares held by Beta Natural Dam, Inc., (v)
526,071 shares held by Beta N Limited, (vi) 894,934 shares held by Beta
Syracuse, Inc., and (vii) 1,362,982 shares held by Beta Beaver Falls, Inc.
(10) Includes 1 share held by Besicorp Group Inc.
</FN>
</TABLE>
PLAN OF DISTRIBUTION
The shares of Common Stock covered by this Prospectus may be offered
and sold from time to time by the Selling Shareholders. The Selling Shareholders
will act independently of the Company in making decisions with respect to the
timing, manner and size of each sale. The Selling Shareholders may sell the
shares being offered hereby on the New York Stock Exchange, or otherwise, at
prices and under terms then prevailing or at prices related to the then current
market price or at negotiated prices. The shares may be sold by one or more of
the following means of distribution: (a) a block trade in which the
broker-dealer so engaged will attempt to sell such shares as agent, but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (d) in privately negotiated transactions. To the extent required, this
Prospectus may be amended and supplemented from time to time to describe a
specific plan of distribution. In connection
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<PAGE>
with distributions of such shares or otherwise, the Selling Shareholders may
enter into hedging transactions with broker-dealers or other financial
institutions. In connection with such transactions, broker-dealers or other
financial institutions may engage in short sales of the Common Stock in the
course of hedging the positions they assume with the Selling Shareholders. The
Selling Shareholders may also sell the Common Stock short and redeliver the
shares to close out such short positions. The Selling Shareholders may also
enter into option or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealer or other financial
institution of shares of Common Stock offered hereby, which shares such
broker-dealer or other financial institution may resell pursuant to this
Prospectus (as supplemented or amended to reflect such transaction). The Selling
Shareholders may also pledge such shares to a broker-dealer or other financial
institution, and, upon a default, such broker-dealer or other financial
institution may effect sales of the pledged shares pursuant to this Prospectus
(as supplemented or amended to reflect such transaction). In addition, any
shares of Common Stock covered by this Prospectus that qualify for sale pursuant
to Rule 144 may be sold under Rule 144 rather than pursuant to this Prospectus.
In effecting sales, brokers, dealers or agents engaged by the Selling
Shareholders may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
Selling Shareholders in amounts to be negotiated prior to the sale. Such brokers
or dealers and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales, and any such commissions, discounts or concessions may be deemed to be
underwriting discounts or commissions under the Securities Act. The Company will
pay all expenses incident to the offering and sale of the shares of Common Stock
covered by this Prospectus to the public other than any commissions and
discounts of underwriters, dealers or agents and any transfer taxes.
In order to comply with the securities laws of certain states, if
applicable, the shares of Common Stock covered by this Prospectus must be sold
in such jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states such shares may not be sold unless they have been
registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirement is available and is complied with.
The Company has advised the Selling Shareholders that the
anti-manipulation rules of Regulation M under the Exchange Act may apply to
sales of shares of Common Stock covered by this Prospectus in the market and to
the activities of the Selling Shareholders and their affiliates. In addition,
the Company will make copies of this Prospectus available to the Selling
Shareholders and has informed them of the need for delivery of copies of this
Prospectus to purchasers at or prior to the time of any sale of the shares of
Common Stock covered by this Prospectus. The Selling Shareholders may indemnify
any broker-dealer that participates in transactions involving the sale of the
shares of Common Stock covered by this Prospectus against certain liabilities,
including liabilities arising under the Securities Act.
At the time a particular offer of shares of Common Stock covered by
this Prospectus is made, if required, a Prospectus Supplement will be
distributed that will set forth the number of shares of Common Stock covered by
this Prospectus being offered and the terms of the offering, including the name
of any underwriter, dealer or agent, the purchase price paid by any underwriter,
any discount, commission and other item constituting compensation, any discount,
commission or concession allowed or reallowed or paid to any dealer, and the
proposed selling price to the public.
The sale of shares of Common Stock covered by this Prospectus by the
Selling Shareholders is subject to compliance by the Selling Shareholders with
certain contractual restrictions with the Company. There can
19
<PAGE>
be no assurance that the Selling Shareholders will sell all or any of the shares
of Common Stock covered by this Prospectus.
The Company has agreed to indemnify the Selling Shareholders and any
person controlling a Selling Shareholder against certain liabilities, including
liabilities under the Securities Act. The Selling Shareholders have agreed to
indemnify the Company and certain related persons against certain liabilities,
including liabilities under the Securities Act.
The Company has agreed with certain of the Selling Shareholders to keep
the Registration Statement of which this Prospectus constitutes a part effective
for up to two years following the effectiveness of the Registration Statement
containing this Prospectus.
VALIDITY OF THE SHARES
The validity of the shares offered hereby will be passed upon for the
Company by Sullivan & Cromwell, New York, New York, counsel to the Company.
EXPERTS
The financial statements incorporated in this Prospectus have been so
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities and Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center,
New York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such materials may be obtained from
the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at the prescribed rates. The
Commission maintains a website (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The Common Stock of the Company is listed on
the New York Stock Exchange, 20 Broad Street, New York, New York 10005, where
reports and other information concerning the Company may be inspected.
Additional information regarding the Company and the securities offered
hereby is contained in the Registration Statement on Form S-3 and the exhibits
thereto (the "Registration Statement") filed with the Commission under the
Securities Act. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is made to the Registration Statement, which may be inspected without
charge at, and copies of which may be obtained at prescribed rates from the
Commission at, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
20
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission
pursuant to the Exchange Act are incorporated in this Prospectus by reference:
1. Annual Report on Form 10-K for the year ended December 31, 1997.
2. Amendment to Annual Report on Form 10-K/A for the year ended December
31, 1997.
3. Second Amendment to Annual Report on Form 10-K/A for the year ended
December 31, 1997.
4. Current Report on Form 8-K dated February 11, 1998.
5. Quarterly Report on Form 10-Q for the three months ended March 31, 1998.
6. Amendment to Quarterly Report on Form 10-Q/A for the three months ended
March 31, 1998.
7. Proxy Statement dated May 29, 1998 for the Company's 1998 Annual
Meeting.
All documents subsequently filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the
Equity Offering will be deemed to be incorporated by reference in this
Prospectus and will be part of this Prospectus from the date of filing of such
documents. Any statement contained in this Prospectus or in any document
incorporated or deemed to be incorporated by reference in this Prospectus will
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus or in any subsequently
filed document that also is or is deemed to be incorporated by reference in this
Prospectus modifies or supersedes such statement. any statement so modified or
superseded will not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company undertakes to provide without charge to each person to whom
a copy of this Prospectus is delivered, upon the written or oral request of any
such person, a copy of any document described in this Prospectus (not including
exhibits to those documents unless such exhibits are incorporated by reference
into the information incorporated into this Prospectus). Requests for copies
should be directed to Niagara Mohawk Power Corporation, 300 Erie Boulevard West,
Syracuse, New York 13202. Attention: Leon T. Mazur, telephone number: (315)
474-1511.
21
<PAGE>
APPENDIX A
GLOSSARY OF CERTAIN ELECTRICITY, NATURAL GAS
AND ACCOUNTING TERMS
TERM DEFINITION
Avoided Costs The costs an electric utility would otherwise incur to
generate power if it did not purchase electricity from
another source.
Cogeneration The simultaneous production of electric energy and useful
thermal energy for industrial, commercial, heating or
cooling purposes.
CTC Competitive Transition Charge.
Electric The delivery of electric energy to customers on
distribution system. Electric energy is carried at
high voltages along transmission lines. For consumers
needing lower voltages, it is reduced in voltage at a
substation and delivered over primary distribution lines
extending throughout the area where the electricity is
distributed. For users needing lower voltage, the voltage
is reduced once again by a distribution transformer or a
line transformer. At this point it changes from primary
to secondary distribution voltage.
GRT Gross Receipts Tax.
GwH Gigawatt-hours: one gigawatt hour equals one billion watt
hours.
IPP Independent Power Producer: any person that owns or
operates, in whole or in part, one or more Independent
Power Facilities.
KW Kilowatt: one thousand watts.
Kwh Kilowatt-hour: a unit of electrical energy equal to one
kilowatt of power supplied or taken from an electric
circuit steadily for one hour.
MW Megawatt: one million watts.
MWh Megawatt hour: one thousand kilowatt hours.
NYSERDA New York State Energy Research and Development Authority.
PPA Power Purchase Agreements: long-term contracts under
which a utility is obligated to purchase electricity from
an IPP at specified rates.
PSC New York State Public Service Commission.
PURPA Public Utility Regulatory Policies Act of 1978, as
amended. One of five bills signed into law on November 8,
1978, as the National Energy Act. It sets forth
procedures and requirements applicable to state utility
commissions, electric and natural gas utilities and
certain federal regulatory agencies. A major aspect of
this law is the mandatory purchase obligation from
qualifying facilities.
SFAS No. 71 Statement of Financial Accounting Standards No. 71
"Accounting for the Effects of Certain Types of
Regulation".
Six-Cent Law Section 66-c of the New York State Public Service Law,
governing minimum prices to be paid under certain PPAs.
Transmission The act or process of transporting electric energy in
bulk from a source or sources of supply to other
principal parts of the system or to other utility
systems. Also a functional classification relating to
that portion of utility plant used for the purpose of
transmitting electric energy in bulk to other principal
parts of the system or to other utility systems, or to
expenses relating to the operation and maintenance of
transmission plant.
Unit 1 Nine Mile Point Nuclear Station Unit No. 1, a 613 MW
nuclear generating facility 100% owned by Niagara Mohawk
and in operation since 1969.
Unit 2 Nine Mile Point Nuclear Station Unit No. 2, a 1144 MW
nuclear generating facility 41% owned by Niagara Mohawk
and in operation since 1988.
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