<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-49541
[LOGO]
PROSPECTUS
June 17, 1998
$3,450,000,000
NIAGARA MOHAWK POWER CORPORATION
<TABLE>
<C> <S>
$300,000,000 6 1/2% SERIES A SENIOR NOTES DUE 1999 $400,000,000 7 3/8% SERIES E SENIOR NOTES DUE
$450,000,000 7% SERIES B SENIOR NOTES DUE 2000 2003
$400,000,000 7 1/8% SERIES C SENIOR NOTES DUE 2001 $400,000,000 7 5/8% SERIES F SENIOR NOTES DUE
$400,000,000 7 1/4% SERIES D SENIOR NOTES DUE 2002 2005
$600,000,000 7 3/4% SERIES G SENIOR NOTES DUE 2008
$500,000,000 8 1/2% SENIOR DISCOUNT NOTES DUE 2010
</TABLE>
The Series A through G Senior Notes and the Senior Discount Notes
(collectively, the "Notes") are being offered (the "Offering") by Niagara Mohawk
Power Corporation (the "Company"). Interest on the Series A, C and E Notes will
be payable semi-annually in arrears on January 1 and July 1 of each year,
commencing on January 1, 1999. Interest on the Series B, D, F and G Notes will
be payable semi-annually in arrears on April 1 and October 1 of each year,
commencing on October 1, 1998. The Series A through G Notes will be redeemable
at the option of the Company, in whole or in part, at any time, at a redemption
price equal to 100% of the principal amount thereof plus accrued interest
thereon, if any, plus the Make-Whole Premium (as defined). In addition, the
Company may, at its option, by delivering a notice of redemption at any time
during the period from April 1, 1999 through December 31, 2000 use the cash
proceeds from any sale or sales of certain assets to redeem up to $500.0 million
aggregate principal amount of the Series B through F Notes on a pro rata basis
(by series) at a redemption price equal to 100% of the principal amount thereof
plus accrued interest thereon, if any, to the date of redemption (the "Special
Redemption"). See "Description of Notes--Special Redemption."
The Senior Discount Notes will be issued in such aggregate principal amount
and bear such rate of interest as will generate gross proceeds of approximately
$328.4 million and will be issued at a substantial discount from their principal
amount. See "Description of Notes" and "Certain United States Federal Income Tax
Considerations." The Senior Discount Notes will accrete at a rate of 8.500%,
compounded semi-annually, to an aggregate principal amount at maturity of $500.0
million by July 1, 2003. Thereafter, the Senior Discount Notes will accrue cash
interest at a rate of 8.500% per annum, payable semi-annually on January 1 and
July 1 of each year, commencing January 1, 2004. The Senior Discount Notes will
be redeemable at the option of the Company, in whole or in part, at any time
prior to July 1, 2003, at a redemption price equal to 100% of the Accreted Value
(as defined) thereof plus the Make-Whole Premium, and at any time on or after
July 1, 2003, at the redemption prices set forth herein, plus accrued interest,
if any, to the date of redemption. See "Description of Notes--Optional
Redemption."
Upon the occurrence of a Change of Control Triggering Event (as defined),
the holders of the Notes will have the right to require the Company to
repurchase their Notes, in whole or in part, at a price equal to 101% of the
aggregate principal amount thereof (in the case of the Series A through G Notes)
or 101% of the Accreted Value of the Senior Discount Notes (if such repurchase
occurs prior to July 1, 2003) or 101% of the principal amount at maturity of the
Senior Discount Notes (if such repurchase occurs on or after July 1, 2003), plus
accrued interest thereon, if any, to the date of repurchase. There can be no
assurance that the Company will have sufficient funds to repurchase the Notes
following a Change of Control Triggering Event.
The Notes are senior unsecured obligations of the Company and will rank PARI
PASSU in right of payment to all existing and future senior indebtedness of the
Company ("Senior Indebtedness"). Upon completion of the Offering, the Company
will have outstanding approximately $6.8 billion of Senior Indebtedness,
consisting primarily of $2.8 billion of First Mortgage Bonds (as defined), which
are secured by a lien on substantially all of the Company's utility property,
$529.0 million of borrowings under the Credit Facility (as defined), which are
secured with First Mortgage Bonds, $20.0 million of unsecured Medium Term Notes
(as defined) and the Notes. In addition, the Company will have available up to
$275.0 million under the Credit Facility. Upon completion of the Offering, the
Company will not have any outstanding indebtedness that ranks junior in right of
payment to the Notes ("Subordinated Indebtedness"). Under the terms of the
Indenture (as defined), the Company may in the future issue additional First
Mortgage Bonds, including in connection with a refinancing of the Credit
Facility, and additional series of Notes, as well as Subordinated Indebtedness,
subject to certain exceptions. See "Description of Notes" and "Description of
Other Indebtedness."
The Company does not intend to list the Notes on any national securities
exchange. Although the Underwriters have indicated that they currently intend to
make a market in the Notes, there can be no assurance that any market for the
Notes will develop or, if any such market develops, that it would continue to
exist. Such market-making activities may be discontinued at any time.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS PRIOR TO ANY INVESTMENT IN
THE NOTES.
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL OR PRICE TO UNDERWRITING
PRINCIPAL AMOUNT THE DISCOUNTS AND
AT MATURITY PUBLIC COMMISSIONS(1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Series A Note............................................ $300,000,000 99.653% 1.000%
Per Series B Note............................................ $450,000,000 99.821% 1.250%
Per Series C Note............................................ $400,000,000 99.694% 1.500%
Per Series D Note............................................ $400,000,000 99.428% 1.750%
Per Series E Note............................................ $400,000,000 99.605% 2.000%
Per Series F Note............................................ $400,000,000 99.645% 2.000%
Per Series G Note............................................ $600,000,000 99.746% 2.000%
Per Senior Discount Note..................................... $500,000,000 65.682% 1.314%
Total.................................................... $ 3,450,000,000 $3,268,528,000 $56,193,200
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------
PROCEEDS TO
THE
COMPANY(2)
- -------------------------------------------------------------
<S> <C>
Per Series A Note............................................ 98.653%
Per Series B Note............................................ 98.571%
Per Series C Note............................................ 98.194%
Per Series D Note............................................ 97.678%
Per Series E Note............................................ 97.605%
Per Series F Note............................................ 97.645%
Per Series G Note............................................ 97.746%
Per Senior Discount Note..................................... 64.368%
Total.................................................... $3,212,334,800
- -------------------------------------------------------------
</TABLE>
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $2,087,240.
The securities are offered by the Underwriters, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters, and subject to various
prior conditions. It is expected that delivery of the Notes will be made in New
York, New York against payment therefor on or about June 30, 1998, which will be
the ninth business day following the date hereof (such settlement cycle being
herein referred to as "T+9"). Purchasers of the Notes should note that trading
of the Notes on the date hereof or the next six succeeding business days may be
affected by the T+9 settlement. See "Underwriting."
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
MERRILL LYNCH & CO.
WASSERSTEIN PERELLA SECURITIES, INC.
J.P. MORGAN & CO.
<PAGE>
SALOMON SMITH BARNEY
CITICORP SECURITIES, INC.
TD SECURITIES
<PAGE>
[LOGO]
THE UNDERWRITERS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
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 IN THEIR ENTIRETY.
SEE "GLOSSARY OF CERTAIN ELECTRICITY, NATURAL GAS TERMS AND ACCOUNTING"
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") have agreed to terminate, restate or
amend 27 power purchase agreements ("PPAs") between the Company and such IPPs in
exchange for cash and shares of the Company's common stock (the "Common Stock").
The closing of this Offering is contingent upon and expected to occur
concurrently with the consummation of the MRA. The closing of the MRA is
presently scheduled for June 30, 1998. The proceeds from this Offering, together
with cash on hand, will be used to fund the Company's cash obligation under the
MRA. Pursuant to the MRA, the Company will also issue approximately 42.9 million
shares of Common Stock either directly to the IPP Parties or a portion of such
42.9 million shares may be sold in a public offering and the net proceeds
thereof paid to the IPP Parties. See "Description of Other Indebtedness," "Use
of Proceeds" and "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 (earnings before interest, income taxes, depreciation and amortization
and extraordinary items), 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 Offering, and the
principal terms of the PowerChoice Agreement excluding the Genco Divestiture,
the Company would 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. 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.
3
<PAGE>
BACKGROUND OF TRANSACTION
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 CENTS 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.
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."
THE MRA
The MRA is an agreement among the Company and 14 IPPs (the "IPP Parties")
that sell electricity to the Company under 27 PPAs, representing in excess of
75% of the Company's estimated above-market power purchase obligation. The
Company expects to consummate the MRA concurrently with and as a condition to
the Offering. Upon consummation of the MRA, the 27 PPAs will be terminated,
restated or amended in exchange for an aggregate payment to the IPP Parties of
approximately $3.6 billion in cash and approximately 42.9 million shares of
Common Stock (representing approximately 23% of the Company's outstanding shares
following such issuance). The closing of the MRA is subject to approval by the
Company's common shareholders of the issuance of Common Stock to the IPP
Parties. See "The MRA and the PowerChoice Agreement."
4
<PAGE>
THE POWERCHOICE AGREEMENT
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 elements of the PowerChoice Agreement
include: (i) a revenue reduction (exclusive of reductions in the New York State
Gross Receipts Tax ("GRT")) of approximately $111.8 million for all customer
classes to be phased-in over three years beginning upon the consummation of the
MRA; (ii) a cap on 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 a regulatory asset, reflecting the recoverable costs of the MRA
which will be amortized generally over ten years (the "MRA Regulatory Asset");
(v) an agreement by the Company to divest its fossil and hydro electric
generating facilities (4,217 MW) within a defined time period and retain its
nuclear generating facilities (1,082 MW) 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. 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 an opportunity to form a holding company
which, if formed, would enhance the Company's ability to explore unregulated
business opportunities to foster longer-term strategic growth. The Company is
seeking approval from its shareholders for the formation of a holding company.
The implementation of a holding company structure, if approved by the Company's
shareholders, would only occur following various regulatory approvals. Upon
formation of a holding company, the Company's obligations under the Notes would
remain with the Company and would not be transferred to the holding company.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.............. $300.0 million principal amount of 6.500% Series A Senior
Notes due 1999; $450.0 million principal amount of 7.000%
Series B Senior Notes due 2000; $400.0 million principal
amount of 7.125% Series C Senior Notes due 2001; $400.0
million principal amount of 7.250% Series D Senior Notes
due 2002; $400.0 million principal amount of 7.375% Series
E Senior Notes due 2003; $400.0 million principal amount
of 7.625% Series F Senior Notes due 2005; $600.0 million
principal amount of 7.750% Series G Senior Notes due 2008;
$500.0 principal amount at maturity of 8.500% Senior
Discount Notes due 2010.
Maturity Dates.................. The Series A, C and E Notes will mature on July 1, 1999,
2001 and 2003, respectively. The Series B, D, F and G
Notes will mature on October 1, 2000, 2002, 2005 and 2008,
respectively. The Senior Discount Notes will mature on
July 1, 2010.
Interest Payment Dates.......... Interest on the Series A, C and E Notes will be payable
semi-annually in arrears on January 1 and July 1 of each
year, commencing on January 1, 1999. Interest on the
Series B, D, F and G Notes will be payable semi-annually
in arrears on April 1 and October 1 of each year,
commencing on October 1, 1998.
The Senior Discount Notes will accrete at a rate of
8.500%, compounded semi-annually on January 1 and July 1
of each year, commencing July 1, 1998, to an aggregate
principal amount of $500.0 million by July 1, 2003.
Thereafter, the Senior Discount Notes will accrue cash
interest at a rate of 8.500% per annum, payable
semi-annually on January 1 and July 1 of each year,
commencing January 1, 2004.
Ranking......................... The Notes are senior unsecured obligations of the Company
and will rank PARI PASSU in right of payment to the Senior
Indebtedness. Upon completion of the Offering, the Company
will have 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 Credit Facility,
which are secured with First Mortgage Bonds, $20.0 million
of unsecured Medium Term Notes, and the Notes. See
"Description of Other Indebtedness."
Mandatory Redemption............ The Company is not required to make mandatory redemption
or sinking fund payments with respect to the Notes prior
to maturity. Under certain circumstances, the Company is
required to make an offer to repurchase Notes. See
"Description of Notes--Proceeds of Certain Asset Sales."
Optional Redemption............. The Series A through G Notes will be redeemable at the
option of the Company, in whole or in part, at any time,
at a redemption price equal to 100% of the principal
amount thereof plus accrued interest thereon, if any, plus
the Make-Whole Premium.
The Senior Discount Notes will be redeemable at the option
of the Company, in whole or in part, at any time prior to
July 1, 2003 at a redemption price equal to 100% of the
Accreted Value thereof plus the Make-Whole Premium and at
any time on or after July 1, 2003 at the redemption prices
set forth herein, plus accrued interest
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
thereon, if any, to the date of redemption. See
"Description of Notes--Optional Redemption."
Special Redemption.............. The Company may, at its option, by delivering a notice of
redemption at any time during the period from April 1,
1999 through December 31, 2000, use the Net Proceeds from
any sale or sales of its fossil and hydro generating
facilities to redeem up to $500.0 million aggregate
principal amount of the Series B through F Notes on a pro
rata basis (by series) at a redemption price equal to 100%
of the principal amount thereof plus accrued interest
thereon, if any, to the date of redemption. See
"Description of Notes--Special Redemption."
Change of Control............... Upon the occurrence of a Change of Control Triggering
Event, the holders of the Notes will have the right to
require the Company to repurchase their Notes, in whole or
in part, at a price equal to 101% of the aggregate
principal amount thereof (in the case of the Series A
through G Notes) or 101% of the Accreted Value of the
Senior Discount Notes (if such repurchase occurs prior to
July 1, 2003) or 101% of the principal amount at maturity
of the Senior Discount Notes (if such repurchase occurs on
or after July 1, 2003), plus accrued interest thereon, if
any, to the date of repurchase. There can be no assurance
that the Company will have sufficient funds to repurchase
the Notes following a Change of Control Triggering Event.
See "Description of Notes--Change of Control."
Covenants....................... The indenture under which the Notes will be issued (the
"Indenture") will contain certain covenants that, among
other things, limit the ability of the Company to pay
dividends, incur additional indebtedness, secure certain
indebtedness without also securing the Notes, enter into
certain transactions with affiliates or consummate certain
mergers or consolidations. See "Description of Notes."
Original Issue Discount......... The Series A and Senior Discount Notes are being issued
with original issue discount for U.S. federal income tax
purposes. Thus, although cash interest will not be payable
on the Series A Notes until January 1, 1999, and on the
Senior Discount Notes prior to January 1, 2004, holders
will be required to include amounts in gross income for
U.S. federal income tax purposes in advance of receipt of
the cash payments to which the income is attributable. See
"Certain United States Federal Income Tax Considerations--
Original Issue Discount."
</TABLE>
RECENT DEVELOPMENTS
Following discussions with the staff of the Securities and Exchange
Commission, the Company has restated its financial results for 1997. Originally,
the Company's fourth-quarter 1997 reported financials reflected a one-time,
non-cash charge of $190.0 million, or $0.85 per share related to the MRA, that
the Company determined was necessary after reviewing the PSC Order.
Subsequently, the Company has decided to recalculate and reflect the non-cash
charge in 1998 upon consummation of the MRA, which is presently scheduled for
June 30, 1998. As a result of such restatement, the Company will report restated
1997 earnings of $145.9 million, or $1.01 per share, as compared to the
previously reported earnings of $22.4 million, or $0.16 per share. In addition,
the Company will report a restated fourth-quarter loss of $(1.4) million, or
$(0.01) per share, as compared to the previously reported loss of $(124.9)
million or $(0.86) per share. All financial data in this Prospectus have been
presented to reflect such restatement.
7
<PAGE>
USE OF PROCEEDS
The Company will use the net proceeds from the Offering, together with cash
on hand to make cash payments to the IPP Parties in connection with the MRA.
Pursuant to the MRA, the Company will also issue approximately 42.9 million
shares of Common Stock either directly to the IPP Parties or a portion of such
42.9 million shares may be sold in a public offering and the net proceeds
thereof paid to the IPP Parties. See "Use of Proceeds" and "The MRA and the
PowerChoice Agreement."
RISK FACTORS
Prospective investors should consider carefully the risks discussed under
"Risk Factors" before deciding to invest in the Notes.
8
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents certain historical and pro forma financial and
operating data of the Company as of the dates and for the periods indicated. The
historical financial data as of the end of and for each of the three years in
the period ended December 31, 1997 are derived from the audited consolidated
financial statements of the Company. The historical financial data as of and for
the three months ended March 31, 1997 and March 31, 1998 are derived from the
unaudited financial statements of the Company, which in the opinion of
management, contain all adjustments necessary for a fair presentation thereof.
The following data should be read in conjunction with "Pro Forma Condensed
Financial Statements," "Selected Historical Financial Data," "Management's
Discussion of Pro Forma Condensed Financial Statements" and the Consolidated
Financial Statements of the Company, including the notes thereto, appearing
elsewhere or incorporated by reference in this Prospectus. The pro forma
financial data are not necessarily indicative of the results that would be
achieved if the pro forma transactions had occurred on the dates indicated or
the results that will be achieved in the future. The results for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be achieved for the full year ending December 31, 1998.
<TABLE>
<CAPTION>
TWELVE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, MARCH 31,
------------------------------------------- -------------------------------- ----------
PRO FORMA PRO FORMA PRO FORMA
1995 1996 1997 1997 (1) 1997 1998 1998(1) 1998(1)
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues....... $3,917,338 $3,990,653 $3,966,404 $3,870,304 $1,163,832 $1,098,404 $1,074,379 $3,804,876
Operating income......... 684,034 522,338 558,839 606,239 231,937 134,297 144,647 502,599
Interest charges......... 279,674 278,033 273,906 522,406 67,538 65,590 126,615 516,058
Income before federal and
foreign income taxes... 407,429 280,248 309,930 102,430 171,499 72,932 20,657 2,263
Net income (loss)........ 248,036 110,390 183,335 48,435 103,022 20,363 (13,612) (35,224)
Balance available for
common stock........... 208,440 72,109 145,938 11,038 93,623 11,140 (22,835) (72,445)
Average shares of common
stock outstanding (in
thousands)............. 144,329 144,350 144,404 187,304 144,389 144,419 187,319 187,312
Basic and diluted
earnings (loss) per
average share of common
stock.................. $ 1.44 $ 0.50 $ 1.01 $ 0.06 $ 0.65 $ 0.08 $ (0.12) $ (0.39)
OTHER OPERATING DATA:
EBITDA (2)............... $ 929,130 $ 957,549 $ 961,502 $1,426,702 358,863 $ 222,273 $ 337,073 $1,318,887
Net cash interest (3).... 260,548 244,501 226,890 456,890 56,305 54,783 111,683 450,968
Capital expenditures
(4).................... 345,804 352,049 290,757 290,757 53,552 132,354 132,354 369,559
Amortization of MRA
Regulatory Asset....... -- -- -- 378,000 -- -- 94,500 378,000
Depreciation and
amortization........... 317,831 329,827 339,641 339,641 84,222 87,950 87,950 343,369
Ratio of EBITDA to net
cash interest (5)...... 3.6x 3.9x 4.2x 3.1x 6.4x 4.1x 3.0x 2.9x
BALANCE SHEET DATA (AT END
OF PERIOD):
Net utility plant........ $7,007,853 $6,957,615 $6,868,044 $6,868,044 $6,919,730 $6,897,664 $6,897,664 $6,897,664
Regulatory assets
(including MRA
Regulatory Asset)...... 1,300,812 1,214,306 1,176,824 5,166,024 1,171,468 1,174,570 5,162,570 5,162,570
Total assets............. 9,477,869 9,427,635 9,584,141 13,419,351 9,515,010 9,707,583 13,542,793 13,542,793
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
TWELVE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, MARCH 31,
------------------------------------------- -------------------------------- ----------
PRO FORMA PRO FORMA PRO FORMA
1995 1996 1997 1997 (1) 1997 1998 1998(1) 1998(1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITALIZATION (AT END OF
PERIOD):
Long-term debt, excluding
current portion........ $3,582,414 $3,477,879 $3,417,381 $6,695,791 $3,478,628 $3,418,299 $6,696,709 $6,696,709
Preferred stock,
excluding current
portion................ 536,850 526,730 516,610 516,610 526,730 516,610 516,610 516,610
Common stockholders'
equity................. 2,513,952 2,585,572 2,727,527 3,170,027 2,676,890 2,739,957 3,182,457 3,182,457
--------- --------- --------- ---------- --------- --------- ---------- ----------
Total capitalization... $6,633,216 $6,590,181 $6,661,518 $10,382,428 $6,682,248 $6,674,866 $10,395,776 $10,395,776
--------- --------- --------- ---------- --------- --------- ---------- ----------
--------- --------- --------- ---------- --------- --------- ---------- ----------
</TABLE>
- ------------------------------
(1) Gives pro forma effect to the consummation of the MRA and the Offering, and
the principal terms of the PowerChoice Agreement excluding the Genco
Divestiture, as if such transactions had occurred on the first day of each
period presented for purposes of the unaudited Pro Forma Condensed
Statements of Income and on December 31, 1997 or March 31, 1998, as
applicable, for purposes of the unaudited Pro Forma Condensed Balance Sheet.
See the "Pro Forma Condensed Financial Statements" including the
accompanying notes.
(2) EBITDA represents earnings before interest charges, interest income, income
taxes, depreciation and amortization, amortization of nuclear fuel,
allowance for funds used during construction, MRA Regulatory Asset
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 contained herein and the Consolidated Statements of Cash Flows
incorporated by reference in this Prospectus.
(3) Net cash interest reflects interest charges plus allowance for funds used
during construction less the non-cash impact of the net amortization of
discount on long-term debt, interest accrued on the Nuclear Waste Policy Act
disposal liability and interest accreted on the Senior Discount Notes that
is not otherwise capitalized less interest income.
(4) Capital expenditures consist of amounts for the Company's construction
program related to its transmission, distribution and generation operations
(including nuclear fuel, related allowance for funds used during
construction and capitalized overhead expenses), and the amounts incurred to
comply with the Clean Air Act and other environmental requirements.
(5) For purposes of determining the ratio of EBITDA to net cash interest, EBITDA
and net cash interest are calculated as described above in notes (2) and
(3). The ratio of EBITDA to net cash interest is presented to provide
additional information about the Company's ability to meet its future
requirements for debt service. See the Pro Forma Condensed Statements of
Income contained herein and the Consolidated Statements of Cash Flows
incorporated by reference in this Prospectus.
10
<PAGE>
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,"
"MANAGEMENT'S DISCUSSION OF PRO FORMA CONDENSED FINANCIAL STATEMENTS" 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.
SUBSTANTIAL LEVERAGE AND LIMITED FINANCIAL FLEXIBILITY
Following consummation of the MRA and the Offering, the Company will have
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 Offering, the Company would have had outstanding approximately $6.8
billion of Senior Indebtedness, consisting 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 Credit Facility, which are
secured with First Mortgage Bonds, $20.0 million of unsecured Medium Term Notes
and the Notes. The Company also will have available additional borrowings of
$275.0 million under the Credit Facility and, under the financial covenants set
forth in the Indenture, will have the ability to incur up to an additional $1.5
billion of indebtedness. See "Capitalization," "Summary Historical and Pro Forma
Financial Data," "The MRA and the PowerChoice Agreement," "Description of
Notes--Certain Covenants--Incurrence of Indebtedness" and "Description of Other
Indebtedness."
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, 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. As a result, any reduction in revenues or significant increase in
costs or expenditures could materially adversely affect the Company's ability to
satisfy its obligations under the Notes. See "Management's Discussion of Pro
Forma Condensed Financial Statements--Liquidity and Capital Resources,"
"Description of Other Indebtedness," and "Description of Notes."
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, including the payment of principal and interest under the
Notes, 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
11
<PAGE>
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 ability to service its
obligations under the Notes 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 becomes
final. 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 herein. Certain parties have filed petitions
for rehearing before the PSC. Of the six petitions filed, three have been
denied. In addition, certain parties 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 and on the cash available to service the Notes.
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 repay the Notes 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 three-year
testing period by
12
<PAGE>
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 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 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 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.
LIMITATIONS ON HOLDERS' CLAIMS WITH RESPECT TO SENIOR DISCOUNT NOTES
The Senior Discount Notes will be issued with a substantial original issue
discount from their principal amount at maturity. Consequently, purchasers of
the Senior Discount Notes will be required to include amounts in gross income
for federal income tax purposes in advance of receipt of the cash payments to
which the income is attributable. See "Certain United States Federal Income Tax
Considerations" for a more detailed discussion of the federal income tax
consequences to the purchasers of the Senior Discount Notes resulting from the
purchase, ownership or disposition thereof.
Under the Indenture, in the event of an acceleration of the maturity of the
Notes upon the occurrence of an Event of Default, holders of the Senior Discount
Notes may be entitled to recover only the amount which may be declared due and
payable pursuant to the Indenture, which could be less than the principal amount
at maturity of such Senior Discount Notes. See "Description of the Notes--Events
of Default and Remedies."
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code, the claim of a holder with respect to the principal
amount thereof may be limited to an amount equal to the sum of (i) the issue
price of the Senior Discount Notes as set forth on the cover page hereof and
(ii) that portion of the original issue discount (as determined on the basis of
such issue price) which is not deemed to constitute "unmatured interest" for
purposes of the United States Bankruptcy Code. Accordingly, under such
circumstances, even if sufficient funds are available, holders may receive a
lesser amount than they otherwise may be entitled to under the express terms of
the Indenture. In addition, there can be no assurance that a bankruptcy court
would compute the accrual of interest by the same method as that used for the
calculation of original issue discount under federal income tax law and,
accordingly, a holder might be required to recognize gain or loss in the event
of a distribution related to such a bankruptcy case. See "Certain United States
Federal Income Tax Considerations--Disposition of Notes."
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
13
<PAGE>
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 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.
Such a non-cash charge would not reduce the Company's capacity to make the types
of payments that are restricted under the Indenture. See "Description of
Notes--Certain Covenants--Restricted Payments."
ABSENCE OF PUBLIC MARKET
The Notes will constitute a new issue of securities with no established
trading market, and the Company does not intend to list the Notes on any
national securities exchange. The Company has been advised by the Underwriters
that they currently intend, following completion of the Offering, to make a
market in the Notes; however, they are not obligated to do so, and any
market-making may be discontinued at any time without notice. Accordingly, no
assurance can be given that any active public or other market will develop for
the Notes or as to the liquidity of the Notes. See "Underwriting."
14
<PAGE>
USE OF PROCEEDS
The proceeds of the Offering (after deducting underwriting discounts and
commissions and other estimated expenses of the Offering payable by the Company)
are expected to be approximately $3.197 billion. All such net proceeds, together
with $447.3 million of cash on hand, will be applied by the Company to make
payments to the IPP Parties pursuant to the MRA. Pursuant to the MRA, the
Company will also issue approximately 42.9 million shares of Common Stock either
directly to the IPP Parties or a portion of such 42.9 million shares may be sold
in a public offering and the net proceeds thereof paid to the IPP Parties. See
"The MRA and the PowerChoice Agreement."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 on a historical basis and as adjusted to give pro forma effect to
consummation of the MRA and the Offering, and the principal terms of the
PowerChoice Agreement excluding the Genco Divestiture. This table should be read
in conjunction with "Pro Forma Condensed Financial Statements," "Summary
Historical and Pro Forma Financial Data," "Management's Discussion of Pro Forma
Condensed Financial Statements" and the Consolidated Financial Statements,
including the notes thereto, appearing elsewhere or incorporated by reference in
this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------
<S> <C> <C>
HISTORICAL PRO FORMA
<CAPTION>
(Dollars in thousands)
<S> <C> <C>
COMMON STOCKHOLDERS' EQUITY:
Common stock, par value $1.00 per share, 185,000,000 shares authorized.(1) Issued
and outstanding 144,419,351 and 187,319,351 shares, respectively................. $ 144,419 $ 187,319
Capital stock premium and expense.................................................. 1,780,978 2,363,378
Retained earnings.................................................................. 814,560 631,760
------------ -------------
2,739,957 3,182,457
------------ -------------
PREFERRED STOCK:
Preferred stock, cumulative, par value $100 per share, 3,400,000 shares authorized:
Mandatorily redeemable. Issued and outstanding 222,000 shares.................... 22,200 22,200
Non-redeemable. Issued and outstanding 2,100,000 shares.......................... 210,000 210,000
Preferred stock, cumulative, par value $25 per share, 19,600,000 shares authorized:
Mandatorily redeemable. Issued and outstanding 2,581,204 shares.................. 64,530 64,530
Non-redeemable. Issued and outstanding 9,200,000 shares.......................... 230,000 230,000
------------ -------------
Total preferred stock.......................................................... 526,730 526,730
Less--Preferred stock due within one year...................................... 10,120 10,120
------------ -------------
516,610 516,610
------------ -------------
Preference stock, par value $25 per share, 8,000,000 shares authorized. None issued
and outstanding.................................................................. -- --
LONG-TERM DEBT:
First Mortgage Bonds............................................................... 2,801,305 2,801,305
Promissory Notes................................................................... 413,760 413,760
Credit Facility.................................................................... 105,000 105,000
Senior Notes....................................................................... -- 2,950,000
Senior Discount Notes.............................................................. -- 328,410
Other long-term debt............................................................... 165,299 165,299
------------ -------------
Total long-term debt........................................................... 3,485,364 6,763,774
Less--Long-term debt due within one year....................................... 67,065 67,065
------------ -------------
3,418,299 6,696,709
------------ -------------
Total capitalization......................................................... $ 6,674,866 $ 10,395,776
------------ -------------
------------ -------------
</TABLE>
- ------------------------
(1) The Company is seeking authorization from its shareholders at its 1998
annual meeting to increase the number of authorized shares of Common Stock.
If such approval is not received, the Company intends either to renegotiate
the terms of the MRA to increase cash and decrease the number of shares of
Common Stock to be issued to the IPP Parties, or to buy outstanding Common
Stock to be used for the MRA payments.
16
<PAGE>
PRO FORMA CONDENSED FINANCIAL STATEMENTS
INTRODUCTION
The following unaudited Pro Forma Condensed Statements of Income and
unaudited Pro Forma Condensed Balance Sheet are based on the historical
Consolidated Financial Statements of the Company incorporated by reference in
this Prospectus, as adjusted to give effect to (i) the consummation of the MRA;
(ii) the consummation of the Offering; (iii) the issuance of approximately 42.9
million shares of Common Stock to the IPP Parties; and (iv) the principal terms
of the PowerChoice Agreement, including the first year impact of a three year
rate reduction intended to reduce the Company's revenues (exclusive of
reductions in the GRT) by approximately $111.8 million by the time it is fully
phased in over three years, and the establishment of the MRA Regulatory Asset
(described in note 6 of the notes to unaudited Pro Forma Condensed Balance
Sheet) which will be amortized by the Company generally over ten years. The
unaudited Pro Forma Condensed Financial Statements do not give effect to the
Genco Divestiture and certain elements of the PowerChoice Agreement that are not
material to the financial results of the Company. The Company is unable at this
time to predict either the timing of the Genco Divestiture or the amount of
proceeds that the Company will receive. In the event that unacceptable bids are
received for any or all of the generating facilities, the Company may spin off
such assets to its shareholders. The net book value of the fossil and hydro
generating facilities at March 31, 1998 was approximately $1.1 billion. The
unaudited Pro Forma Condensed Statements of Income have been prepared to reflect
the consummation of the MRA and the Offering, and the principal terms of the
PowerChoice Agreement, excluding the Genco Divestiture, as if they had occurred
on the first day of each period presented. The unaudited Pro Forma Condensed
Balance Sheet has been prepared to reflect the consummation of the MRA and the
Offering, and the principal terms of the PowerChoice Agreement, excluding the
Genco Divestiture, as if they had occurred on March 31, 1998.
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, and other expenses related to the MRA. The pro forma income
statements for the year ended December 31, 1997 and the three and twelve months
ended March 31, 1998 do not include an adjustment for the one-time, non-cash
write-off associated with the PSC Order that limited the amount of the MRA
Regulatory Asset that can be recovered from customers. Because the value of the
Common Stock to be paid as consideration to the IPP Parties can only be
determined at the closing of the MRA, the value of the limitation on the
recoverability of the MRA Regulatory Asset is expected to be recorded as a
charge to expense in the second quarter of 1998 upon the closing of the MRA. The
charge to expense will be determined as the difference between $8 per share and
the Company's closing Common Stock price on the date the MRA closes. Using the
Company's closing Common Stock price on June 16, 1998 of $14 9/16 per share,
multiplied by approximately 42.9 million shares, the estimated charge to expense
would be approximately $281.5 million. The ultimate amount of the charge to
expense will be based upon the Company's closing Common Stock price on the date
of the MRA closing. See "The MRA and the PowerChoice Agreement."
The unaudited Pro Forma Condensed Financial Statements and accompanying
notes should be read in conjunction with the Company's historical Consolidated
Financial Statements and the notes thereto incorporated by reference in this
Prospectus. The unaudited Pro Forma Condensed Financial Statements are presented
for informational purposes only and do not purport to represent what the
Company's financial position or results of operations would actually have been
if the consummation of the MRA and the Offering, and the principal terms of the
PowerChoice Agreement, excluding the Genco Divestiture, had occurred on the
dates set forth herein, or to project the Company's financial position or
results of operations at any future date or for any future period. However, the
unaudited Pro Forma Condensed Financial Statements contain, in the opinion of
management, all adjustments necessary for a fair presentation.
17
<PAGE>
PRO FORMA CONDENSED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
(Dollars in thousands except per share
data)
<S> <C> <C> <C>
Operating Revenues:
Electric.......................................................... $ 3,309,441 $ (56,300)(1)
(39,800)(2) $ 3,213,341
Gas............................................................... 656,963 656,963
----------- ---------------- -----------
3,966,404 (96,100) 3,870,304
----------- ---------------- -----------
Operating Expenses:
Fuel for electric generation...................................... 179,455 179,455
Electricity purchased:
IPP............................................................. 1,105,970 (807,000)(3)
203,700(3)
81,800(3) 584,470
Others.......................................................... 130,138 130,138
Gas purchased..................................................... 345,610 345,610
Other operation and maintenance................................... 835,282 835,282
Amortization of MRA Regulatory Asset.............................. -- 378,000(4) 378,000
Depreciation and amortization..................................... 339,641 339,641
Other taxes....................................................... 471,469 471,469
----------- ---------------- -----------
3,407,565 (143,500) 3,264,065
----------- ---------------- -----------
Operating income.................................................... 558,839 47,400 606,239
----------- ---------------- -----------
Other income........................................................ 24,997 (6,400)(5) 18,597
----------- ---------------- -----------
Income before interest charges...................................... 583,836 41,000 624,836
Interest charges.................................................... 273,906 25,500(6)
248,200(7)
(25,200)(7) 522,406
----------- ---------------- -----------
Income before federal and foreign income taxes...................... 309,930 (207,500) 102,430
Federal and foreign income taxes.................................... 126,595 (72,600)(8) 53,995
----------- ---------------- -----------
Net income.......................................................... 183,335 (134,900) 48,435
Dividends on preferred stock........................................ 37,397 37,397
----------- ---------------- -----------
Balance available for common stock.................................. $ 145,938 $ (134,900) $ 11,038
----------- ---------------- -----------
----------- ---------------- -----------
Average number of shares of common stock outstanding (in
thousands)........................................................ 144,404 42,900(9) 187,304
Basic and diluted earnings per average share of common stock........ $ 1.01 $ 0.06
OTHER OPERATING DATA:
EBITDA (10)....................................................... $ 961,502 $ 1,426,702
Net cash interest (11)............................................ 226,890 456,890
Ratio of EBITDA to net cash interest (12)......................... 3.1x
Ratio of earnings to fixed charges (13)........................... 1.2x
Ratio of earnings to fixed charges and preferred dividend
requirements (13)............................................... 1.0x
</TABLE>
See accompanying notes to Pro Forma Condensed Statements of Income
18
<PAGE>
PRO FORMA CONDENSED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
(Dollars in thousands except per share
data)
<S> <C> <C> <C>
Operating Revenues:
Electric........................................................ $ 863,169 $ (14,075)(1)
(9,950)(2) $ 839,144
Gas............................................................. 235,235 235,235
---------- -------------- ----------
1,098,404 (24,025) 1,074,379
---------- -------------- ----------
Operating Expenses:
Fuel for electric generation.................................... 47,198 47,198
Electricity purchased:
IPP........................................................... 299,938 (201,500)(3)
53,275(3)
19,350(3) 171,063
Others........................................................ 24,412 24,412
Gas purchased................................................... 115,452 115,452
Other operation and maintenance................................. 262,362 262,362
Amortization of MRA Regulatory Asset............................ 94,500(4) 94,500
Depreciation and amortization................................... 87,950 87,950
Other taxes..................................................... 126,795 126,795
---------- -------------- ----------
964,107 (34,375) 929,732
---------- -------------- ----------
Operating income.................................................. 134,297 10,350 144,647
---------- -------------- ----------
Other income...................................................... 4,225 (1,600)(5) 2,625
---------- -------------- ----------
Income before interest charges.................................... 138,522 8,750 147,272
Interest charges.................................................. 65,590 6,375(6)
60,950(7)
(6,300)(7) 126,615
---------- -------------- ----------
Income before federal and foreign income taxes.................... 72,932 (52,275) 20,657
Federal and foreign income taxes.................................. 52,569 (18,300)(8) 34,269
---------- -------------- ----------
Net income (loss)................................................. 20,363 (33,975) (13,612)
Dividends on preferred stock...................................... 9,223 9,223
---------- -------------- ----------
Balance available for common stock................................ $ 11,140 $ (33,975) $ (22,835)
---------- -------------- ----------
---------- -------------- ----------
Average number of shares of common stock outstanding (in
thousands)...................................................... 144,419 42,900(9) 187,319
Basic and diluted earnings (loss) per average share of common
stock........................................................... $ 0.08 $ (0.12)
OTHER OPERATING DATA:
EBITDA (10)..................................................... $ 222,273 $ 337,073
Net cash interest (11).......................................... 54,783 111,683
Ratio of EBITDA to net cash interest (12)....................... 3.0x
Ratio of earnings to fixed charges (13)......................... 1.2x
Ratio of earnings to fixed charges and preferred dividend
requirements (13)............................................. 1.1x
</TABLE>
See accompanying notes to Pro Forma Condensed Statements of Income
19
<PAGE>
PRO FORMA CONDENSED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1998
-----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
(Dollars in thousands except per share
data)
<S> <C> <C> <C>
Operating Revenues:
Electric........................................................ $ 3,295,241 $ (56,300)(1)
(39,800)(2) $ 3,199,141
Gas............................................................. 605,735 605,735
------------ ------------- ------------
3,900,976 (96,100) 3,804,876
------------ ------------- ------------
Operating Expenses:
Fuel for electric generation.................................... 189,188 189,188
Electricity purchased:
IPP........................................................... 1,107,697 (806,000)(3)
213,100(3)
77,400(3) 592,197
Others........................................................ 123,958 123,958
Gas purchased................................................... 312,431 312,431
Other operation and maintenance................................. 890,979 890,979
Amortization of MRA Regulatory Asset............................ 378,000(4) 378,000
Depreciation and amortization................................... 343,369 343,369
Other taxes..................................................... 472,155 472,155
------------ ------------- ------------
3,439,777 (137,500) 3,302,277
------------ ------------- ------------
Operating income.................................................. 461,199 41,400 502,599
Other income...................................................... 22,122 (6,400)(5) 15,722
------------ ------------- ------------
Income before interest charges.................................... 483,321 35,000 518,321
Interest charges.................................................. 271,958 25,500(6)
243,800(7)
(25,200)(7) 516,058
------------ ------------- ------------
Income before federal and foreign income taxes.................... 211,363 (209,100) 2,263
Federal and foreign income taxes.................................. 110,687 (73,200)(8) 37,487
------------ ------------- ------------
Net income (loss)................................................. 100,676 (135,900) (35,224)
Dividends on preferred stock...................................... 37,221 37,221
------------ ------------- ------------
Balance available for common stock................................ $ 63,455 $ (135,900) $ (72,445)
------------ ------------- ------------
------------ ------------- ------------
Average number of shares of common stock outstanding (in
thousands)...................................................... 144,412 42,900(9) 187,312
Basic and diluted earnings (loss) per average share of common
stock........................................................... $ 0.44 $ (0.39)
OTHER OPERATING DATA:
EBITDA (10)..................................................... $ 859,687 $ 1,318,887
Net cash interest (11).......................................... 225,368 450,968
Ratio of EBITDA to net cash interest (12)....................... 2.9x
Ratio of earnings to fixed charges (13)......................... 1.0x
Ratio of earnings to fixed charges and preferred dividend
requirements (13)............................................. 0.9x
</TABLE>
See accompanying notes to Pro Forma Condensed Statements of Income
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
The following notes set forth the explanations and assumptions used and
adjustments made in preparing the unaudited Pro Forma Condensed Statements of
Income for the year ended December 31, 1997 and for the three and twelve months
ended March 31, 1998. The unaudited Pro Forma Condensed Statements of Income
should be read in conjunction with the historical Consolidated Financial
Statements and the notes thereto incorporated by reference in this Prospectus.
The adjustments described below are based on the assumptions and preliminary
estimates described therein and are subject to change. These statements do not
purport to be indicative of the results of operations of the Company for such
period, nor are they indicative of future results. All of the following
adjustments for the year ended December 31, 1997 and for the three and twelve
months ended March 31, 1998, are pro forma to reflect the consummation of the
MRA and the Offering, and the principal terms of the PowerChoice Agreement
excluding the Genco Divestiture, as if they had occurred on the first day of
each respective period.
The pro forma income statements for the year ended December 31, 1997 and the
three and twelve months ended March 31, 1998 do not include an adjustment for
the one-time, non-cash write-off associated with the PSC Order that limited the
amount of the MRA Regulatory Asset that can be recovered from customers. Using
the Company's closing Common Stock price on June 16, 1998 of $14 9/16 per share,
multiplied by approximately 42.9 million shares, the estimated charge to expense
would be approximately $281.5 million. The ultimate amount of the charge to
expense will be based upon the Company's closing Common Stock price on the date
of the MRA closing.
The unaudited Pro Forma Statements of Income include the following pro forma
adjustments based on the assumptions described below:
(1) To reflect the first year impact on total electric revenues of the rate
reduction requirements contained in the PowerChoice Agreement, which provides
for rate reductions to be phased in over three years. These rate reductions are
intended to result in a decrease in electric revenues (exclusive of reductions
in the GRT) of approximately $111.8 million by the time they are fully phased in
over the three years, of which the first year impact for the year ended December
31, 1997, the three months ended March 31, 1998 and the twelve months ended
March 31, 1998 is estimated to be approximately $56.3 million, $14.1 million and
$56.3 million, respectively. Of the first year revenue reduction applicable to
the year ended December 31, 1997 and the twelve months ended March 31, 1998,
approximately $12.0 million relates to residential and small commercial
customers and is calculated as a price reduction of approximately 0.08 CENTS per
Kwh (or approximately 0.7%) to 1997 average prices applied against sales to
those customers of 14,475,005 Mwhs and 14,306,055 Mwhs in each period,
respectively. Approximately $13.4 million of revenue reductions relate to large
commercial and small industrial customers and are calculated as a reduction of
approximately 0.20 CENTS per Kwh (or approximately 2.0%) to 1997 average prices
applied against sales to those customers of 6,529,095 Mwhs and 6,495,852 Mwhs in
each period, respectively. The remaining $30.9 million of revenue reductions
relate to large industrial customers and are comprised of several adjustments,
including a revenue reduction of $24.9 million based on a price reduction of
approximately 0.34 CENTS per Kwh (or approximately 4.3%) to 1997 average prices
applied against sales to those customers of 7,387,140 Mwhs and 7,443,164 Mwhs in
each period, respectively, and net increases in anticipated discounts to
specific customers of $6.0 million. The pro forma adjustment for revenue
reductions for the three months ended March 31, 1998 is calculated as one
quarter of the revenue reductions for the twelve months ended March 31, 1998.
The actual rate reductions in any year will be affected by numerous factors such
as the volume of electricity sold and the timing of the rate reductions.
(2) To reflect a deferral of revenues required by the PSC Order. The amount
of the deferral is based on the difference between the assumed weighted average
interest rate of 8.5% used by the Company to prepare its PowerChoice proposal
and the weighted average interest rate of 7.29% for the Series A through G
Notes. The amount of the deferral for the year ended December 31, 1997, the
three months
21
<PAGE>
ended March 31, 1998 and the twelve months ended March 31, 1998 would be $39.8
million, $10.0 million and $39.8 million, respectively.
(3) To reflect (i) the elimination of $807.0 million, $201.5 million and
$806.0 million of electricity purchased costs for the year ended December 31,
1997, the three months ended March 31, 1998 and the twelve months ended March
31, 1998, respectively, reflecting the termination, restatement or amendment of
the 27 PPAs pursuant to the MRA; (ii) the addition of approximately $203.7
million, $53.3 million and $213.1 million of electricity purchased costs for the
year ended December 31, 1997, the three months ended March 31, 1998 and the
twelve months ended March 31, 1998, respectively, reflecting the Company's
commitment to purchase electricity under the restated and amended contracts
entered into with certain IPP Parties as part of the MRA; and (iii) the addition
of approximately $81.8 million, $19.4 million and $77.4 million of electricity
purchased costs for the year ended December 31, 1997, the three months ended
March 31, 1998 and the twelve months ended March 31, 1998, respectively,
reflecting the estimated cost of market purchases of electricity to replace the
capacity terminated as part of the MRA. These adjustments decreased the cost of
electricity purchased from the IPPs by a net amount of $521.5 million, $128.9
million and $515.5 million for the year ended December 31, 1997, the three
months ended March 31, 1998 and the twelve months ended March 31, 1998,
respectively. The cost of electricity purchased under the restated and amended
contracts for the year ended December 31, 1997 and the twelve months ended March
31, 1998 is based on the first year prices set forth in each of such contracts
applied to purchases of 4,340,376 MW also established in the restated and
amended contracts. The estimated cost of replacement power is based on the
administratively determined SC-6 "buy-back" rate from qualifying facility
projects, as approved by the PSC, applied against 4,645,370 MW and 4,391,791 MW
of market purchases for the year ended December 31, 1997 and the twelve months
ended March 31, 1998, respectively. The weighted average buy-back rate for each
period was approximately 1.8 CENTS per Kwh. A 1.0 CENTS per Kwh change in the
buy-back rate will impact the annual cost of electricity purchased by
approximately $43.4 million. The pro forma adjustments relating to the cost of
electricity purchased under the restated and amended contracts and the cost of
replacement power for the three months ended March 31, 1998 is calculated as one
quarter of the similar adjustments for the twelve months ended March 31, 1998.
(4) To reflect the amortization of the $3.997 billion MRA Regulatory Asset
established as a result of the MRA and the PowerChoice Agreement. Pursuant to
the PowerChoice Agreement, the Company will amortize the MRA Regulatory Asset
generally over ten years. The amortization amounted to $378.0 million, $94.5
million and $378.0 million for the year ended December 31, 1997, the three
months ended March 31, 1998 and the twelve months ended March 31, 1998,
respectively. See "The MRA and the PowerChoice Agreement."
(5) To reflect interest expense, in accordance with the appropriate
regulatory treatment, of $6.4 million, $1.6 million and $6.4 million for the
year ended December 31, 1997, the three months ended March 31, 1998 and the
twelve months ended March 31, 1998, respectively, on a $157.1 million reduction
in the amount of cash compensation paid to the IPP Parties in exchange for
adjustments to the restated contracts pursuant to an amendment to the MRA dated
April 22, 1998, the amount of which is reflected in the MRA Regulatory Asset.
See "The MRA and the Power Choice Agreement."
(6) To reflect the amortization of the total debt issuance costs of
approximately $88.3 million incurred and capitalized in connection with the
Offering, including approximately $9.9 million of debt issuance discounts. The
debt issuance costs will be amortized over the life of the indebtedness
represented by the Offering using the interest method and would have amounted to
$25.5 million, $6.4 million and $25.5 million for the year ended December 31,
1997, the three months ended March 31, 1998 and the twelve months ended March
31, 1998, respectively.
(7) To reflect additional interest charges associated with the indebtedness
represented by the Offering and borrowings that would have been drawn under the
Company's receivables facility in order to fund the Company's cash obligations
under the MRA. Interest charges on the indebtedness represented by
22
<PAGE>
the Series A through G Notes were calculated at the weighted average interest
rate of 7.29% and amounted to $215.0 million, $53.7 million and $215.0 million
for the year ended December 31, 1997, the three months ended March 31, 1998 and
the twelve months ended March 31, 1998, respectively. The amount of accreted
interest on the Senior Discount Notes was calculated at the interest rate of
8.5% and amounted to $27.9 million, $7.0 million and $27.9 million for the year
ended December 31, 1997, the three months ended March 31, 1998 and the twelve
months ended March 31, 1998, respectively, of which $25.2 million, $6.3 million
and $25.2 million, respectively, was capitalized as part of the MRA Regulatory
Asset for such periods. The amount of the accreted interest that was not
deferred to the MRA Regulatory Asset was $2.7 million, $0.7 million and $2.7
million, respectively, for such periods. Further, interest charges on the
additional borrowings under the receivables facility were calculated assuming an
interest rate of 7.5% and amounted to $5.3 million, $0.3 million and $0.9
million for the year ended December 31, 1997, the three months ended March 31,
1998 and the twelve months ended March 31, 1998, respectively.
(8) To reflect a reduction of $72.6 million, $18.3 million and $73.2
million for the year ended December 31, 1997, the three months ended March 31,
1998 and the twelve months ended March 31, 1998, respectively, in federal and
foreign income taxes as a result of the reduction in pro forma income before
federal and foreign income taxes, calculated at the statutory federal income tax
rate of 35.0%. Pro forma income before federal and foreign income taxes is
reduced by $207.5 million, $52.3 million and $209.1 million, respectively, for
such periods as the net result of the pro forma adjustments described in notes
(1) through (7).
(9) To reflect the issuance of approximately 42.9 million shares of Common
Stock to the IPP Parties as part of the consideration paid to them under the
MRA.
(10) EBITDA represents earnings before interest charges, interest income,
income taxes, depreciation and amortization, amortization of nuclear fuel,
allowance for funds used during construction, MRA Regulatory Asset 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 contained herein
and the Consolidated Statements of Cash Flows incorporated by reference in this
Prospectus.
(11) Net cash interest reflects interest charges plus allowance for funds
used during construction less the non-cash impact of the net amortization of
discount on long-term debt, interest accrued on the Nuclear Waste Act disposal
liability and interest accreted on the Senior Discount Notes that is not
otherwise capitalized less interest income.
(12) For purposes of determining the ratio of EBITDA to net cash interest,
EBITDA and net cash interest are calculated as described above in notes (10) and
(11). The ratio of EBITDA to net cash interest is presented to provide
additional information about the Company's ability to meet its future
requirements for debt service. See the Pro Forma Condensed Statements of Income
contained herein and the Consolidated Statements of Cash Flows incorporated by
reference in this Prospectus.
(13) For purposes of determining the ratio of earnings to fixed charges and
the ratio of earnings to fixed charges and preferred dividend requirements, (i)
earnings consist of income before federal and foreign income taxes plus fixed
charges; (ii) fixed charges consist of interest charges on all indebtedness,
including the portion of rental expense that is representative of the interest
factor; and (iii) preferred dividend requirements include the dividends on all
classes of preferred stock adjusted to a pre-tax basis.
23
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
AT MARCH 31, 1998
----------------------------------------------
<S> <C> <C> <C>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
<CAPTION>
(Dollars in thousands)
<S> <C> <C> <C>
Net utility plant............................................. $ 6,897,664 $ 6,897,664
------------ -------------
Other property and investments................................ 296,976 296,976
------------ -------------
Current Assets:
Cash...................................................... 436,256 $ 3,196,728(1)
(3,644,000)(2)
11,500(3) 484
Other current assets...................................... 829,872 75,000(4)
137,800(5)
(11,500)(3) 1,031,172
------------ ----------------- -------------
1,266,128 (234,472) 1,031,656
------------ ----------------- -------------
MRA Regulatory Asset.......................................... 8,700 3,988,000(6) 3,996,700
Other regulatory assets....................................... 1,165,870 1,165,870
Other assets.................................................. 72,245 81,682(7) 153,927
------------ ----------------- -------------
Total assets................................................ $ 9,707,583 $ 3,835,210 $ 13,542,793
------------ ----------------- -------------
------------ ----------------- -------------
</TABLE>
See accompanying notes to Pro Forma Condensed Balance Sheet
24
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------------------------
<S> <C> <C> <C>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
<CAPTION>
(Dollars in thousands)
<S> <C> <C> <C>
Capitalization:
Common stockholders' equity:
Common stock................................................. $ 144,419 $ 42,900(8) $ 187,319
Capital stock premium and expense............................ 1,780,978 582,400(8) 2,363,378
Retained earnings............................................ 814,560 (182,800)(9) 631,760
------------ ---------------- -------------
2,739,957 442,500 3,182,457
Preferred stock................................................ 516,610 516,610
Long-term debt................................................. 3,418,299 3,278,410(1) 6,696,709
------------ ---------------- -------------
Total capitalization......................................... 6,674,866 3,720,910 10,395,776
Current liabilities............................................ 613,524 613,524
Regulatory liabilities......................................... 239,880 239,880
Other liabilities.............................................. 2,179,313 75,000(4)
137,800(5)
(98,500)(9) 2,293,613
------------ ---------------- -------------
Total liabilities and stockholders' equity................... $ 9,707,583 $ 3,835,210 $ 13,542,793
------------ ---------------- -------------
------------ ---------------- -------------
</TABLE>
See accompanying notes to Pro Forma Condensed Balance Sheet
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
The following notes set forth the explanations and assumptions used and
adjustments made in preparing the unaudited Pro Forma Condensed Balance Sheet at
March 31, 1998. The unaudited Pro Forma Condensed Balance Sheet should be read
in conjunction with the historical Consolidated Financial Statements and the
notes thereto incorporated by reference in this Prospectus.
The adjustments described below are based on the assumptions and preliminary
estimates described therein and are subject to change. These statements do not
purport to be indicative of the financial position of the Company as of such
date, nor are they indicative of future results. Furthermore, this unaudited Pro
Forma Condensed Balance Sheet does not reflect anticipated changes, other than
the consummation of the MRA and the Offering, and the principal terms of the
PowerChoice Agreement excluding the Genco Divestiture, which may occur as the
result of operating activities before and after the effective date of the MRA,
the Offering, the PowerChoice Agreement and other matters. All of the following
adjustments are based on the assumption that the consummation of the MRA and the
Offering, and the principal terms of the PowerChoice Agreement excluding the
Genco Divestiture had occurred on March 31, 1998.
The unaudited Pro Forma Condensed Balance Sheet includes the following pro
forma adjustments based on the assumptions described below:
(1) To reflect the gross cash proceeds of $3.269 billion received by the
Company from the Offering, reduced for (i) the payment of the remaining debt
issuance costs estimated by the Company to be approximately $71.8 million; and
(ii) approximately $9.9 million of debt issuance discounts.
(2) To reflect the cash compensation of $3.631 billion paid to the IPP Parties
pursuant to the terms of the MRA and payment of $13.0 million in other remaining
expenses related to the MRA. Approximately $8.7 million of other expenses had
been incurred and capitalized as the MRA Regulatory Asset as of March 31, 1998.
(3) To reflect partial usage of the Company's receivables facility in light of
the liquidity requirements presented in the Pro Forma Condensed Balance Sheet.
Such adjustment is representative of the Company's normal cash management
practices.
(4) To record the reversal of $75.0 million of estimated federal income tax
payments which would not have been made as a result of the deduction of payments
made in connection with the MRA.
(5) To record a federal income tax receivable of $137.8 million, based on the
net operating loss which would have been generated and carried back two years
for income tax purposes. The net loss for income tax purposes results from the
current deduction for income tax purposes of the full amount of the
consideration, including cash and Common Stock, paid to the IPP Parties pursuant
to the MRA. See "Risk Factors--Federal Income Tax Implications of MRA to the
Company."
(6) To reflect the establishment of a $3.997 billion MRA Regulatory Asset
representing the recoverable costs of the MRA consisting of (i) the cash
compensation of $3.631 billion paid to the IPP Parties; (ii) the issuance of
approximately 42.9 million shares of Common Stock valued at an aggregate of
$344.0 million or $8.00 per share, based on the limitation on the amount of the
MRA Regulatory Asset, as set forth in the PSC Order; and (iii) other remaining
expenses of $13.0 million related to the MRA. Approximately $8.7 million of
other expenses had been incurred and capitalized as the MRA Regulatory Asset as
of March 31, 1998. The MRA Regulatory Asset was established pursuant to the
PowerChoice Agreement and will be amortized generally over ten years. See "The
MRA and the PowerChoice Agreement."
(7) To reflect the capitalization of the estimated remaining debt issuance
costs of approximately $81.7 million resulting from the Offering, including
approximately $9.9 million of debt issuance discounts.
26
<PAGE>
(8) To reflect the issuance of approximately 42.9 million shares of Common
Stock to the IPP Parties pursuant to the MRA. These shares will be valued at the
price of the Common Stock on the date of the consummation of the MRA. For
purposes of developing the Pro Forma Condensed Balance Sheet, the Company used
the price of the Common Stock at the close of business on June 16, 1998, or
$14 9/16. This adjustment to common stockholders' equity will change based on
the price of the Common Stock on the date of the consummation of the MRA.
(9) To reflect the charge to earnings and related tax benefit associated with
the PSC's limitation of the amount of the MRA Regulatory Asset that can be
recovered from customers. The amount represents the product of the difference
between $8 and the closing price of the Common Stock on June 16, 1998 of
$14 9/16 multiplied by approximately 42.9 million shares. The ultimate amount of
the charge to expense will be based upon the Company's closing Common Stock
price on the date of the MRA closing.
27
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents certain historical financial and operating data
of the Company as of the dates and for the periods indicated. The historical
financial data as of the end of and for each of the five years in the period
ended December 31, 1997 are derived from the audited Consolidated Financial
Statements of the Company. The historical financial data as of and for the three
months ended March 31, 1997 and March 31, 1998 are derived from the unaudited
financial statements of the Company, which in the opinion of management, contain
all adjustments necessary for a fair presentation thereof.
The selected historical financial data presented below should be read in
conjunction with the Consolidated Financial Statements of the Company, including
the notes thereto, appearing elsewhere or incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues:
Electric.............................. $3,332,464 $3,528,987 $3,335,548 $3,308,979 $3,309,441 $ 877,369 $ 863,169
Gas................................... 600,967 623,191 581,790 681,674 656,963 286,463 235,235
--------- --------- --------- --------- --------- --------- ---------
3,933,431 4,152,178 3,917,338 3,990,653 3,966,404 1,163,832 1,098,404
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Fuel for electric generation.......... 231,064 219,849 165,929 181,486 179,455 37,465 47,198
Electricity purchased:
IPP............................... 745,335 966,724 1,011,518 1,052,298 1,105,970 298,211 299,938
Others............................ 118,178 140,409 126,419 130,594 130,138 30,592 24,412
Gas purchased......................... 326,273 315,714 276,232 370,040 345,610 148,631 115,452
Other operation and maintenance....... 1,057,580 957,377 817,897 928,224 835,282 206,665 262,362
Employee reduction program............ -- 196,625 -- -- -- -- --
Depreciation and amortization......... 276,623 308,351 317,831 329,827 339,641 84,222 87,950
Other taxes........................... 491,363 496,922 517,478 475,846 471,469 126,109 126,795
--------- --------- --------- --------- --------- --------- ---------
3,246,416 3,601,971 3,233,304 3,468,315 3,407,565 931,895 964,107
--------- --------- --------- --------- --------- --------- ---------
Operating income......................... 687,015 550,207 684,034 522,338 558,839 231,937 134,297
Other income............................. 14,154 17,204 3,069 35,943 24,997 7,100 4,225
--------- --------- --------- --------- --------- --------- ---------
Income before interest charges........... 701,169 567,411 687,103 558,281 583,836 239,037 138,522
Interest charges......................... 282,263 278,958 279,674 278,033 273,906 67,538 65,590
--------- --------- --------- --------- --------- --------- ---------
Income before federal and foreign income
taxes.................................. 418,906 288,453 407,429 280,248 309,930 171,499 72,932
Federal and foreign income taxes......... 147,075 111,469 159,393 102,494 126,595 68,477 52,569
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary item......... 271,831 176,984 248,036 177,754 183,335 103,022 20,363
Extraordinary item....................... -- -- -- (67,364) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income............................... 271,831 176,984 248,036 110,390 183,335 103,022 20,363
Dividends on preferred stock............. 31,857 33,673 39,596 38,281 37,397 9,399 9,223
--------- --------- --------- --------- --------- --------- ---------
Balance available for common stock....... $ 239,974 $ 143,311 $ 208,440 $ 72,109 $ 145,938 $ 93,623 $ 11,140
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Average number of shares of common stock
outstanding (in thousands)............. 140,417 143,621 144,329 144,350 144,404 144,389 144,419
Basic and diluted earnings per average
share of common stock before
extraordinary item..................... $ 1.71 $ 1.00 $ 1.44 $ 0.97 $ 1.01 $ 0.65 $ 0.08
Extraordinary item per average share of
common stock........................... $ -- $ -- $ -- $ (0.47) $ -- $ -- $ --
Basic and diluted earnings per average
share of common stock.................. $ 1.71 $ 1.00 $ 1.44 $ 0.50 $ 1.01 $ 0.65 $ 0.08
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
EBITDA(1).............................. $ 950,099 $1,029,865 $ 929,130 $ 957,549 $ 961,502 $ 358,863 $ 222,273
Net cash interest(2)................... 271,116 261,655 260,548 244,501 226,890 56,305 54,783
Capital expenditures(3)................ 519,612 490,124 345,804 352,049 290,757 53,552 132,354
Ratio of EBITDA to net cash
interest(4).......................... 3.5x 3.9x 3.6x 3.9x 4.2x 6.4x 4.1x
Ratio of earnings to fixed
charges(5)........................... 2.3x 1.9x 2.3x 1.6x 2.0x 3.4x 2.1x
Ratio of earnings to fixed charges and
preferred dividend requirements(5)... 2.0x 1.6x 1.9x 1.3x 1.7x 2.8x 1.4x
BALANCE SHEET DATA (AT END OF PERIOD):
Net utility plant...................... $6,877,292 $7,035,643 $7,007,853 $6,957,615 $6,868,044 $6,919,730 $6,897,664
Total assets........................... 9,471,327 9,649,816 9,477,869 9,427,635 9,584,141 9,515,010 9,707,583
Total long-term debt, including current
portion.............................. 3,474,797 3,375,845 3,647,478 3,525,963 3,484,476 3,523,412 3,485,364
Preferred stock, including current
portion.............................. 440,400 556,950 546,000 535,600 526,730 535,600 526,730
Common stockholders' equity............ 2,456,465 2,462,398 2,513,952 2,585,572 2,727,527 2,676,890 2,739,957
</TABLE>
- ------------------------
(1) EBITDA represents earnings before interest charges, interest income, income
taxes, depreciation and amortization, amortization of nuclear fuel,
allowance for funds used during construction, 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 Consolidated Statements of Cash Flows incorporated by reference in this
Prospectus.
(2) Net cash interest reflects interest charges plus allowance for funds used
during construction less the non-cash impact of the net amortization of
discount on long-term debt and interest accrued on the Nuclear Waste Policy
Act disposal liability less interest income.
(3) Capital expenditures consist of amounts for the Company's construction
program related to its transmission, distribution and generation operations
(including nuclear fuel, related allowance for funds used during
construction and capitalized overhead expenses), and the amounts incurred to
comply with the Clean Air Act and other environmental requirements.
(4) For purposes of determining the ratio of EBITDA to net cash interest, EBITDA
and net cash interest are calculated as described above in notes (1) and
(2). The ratio of EBITDA to net cash interest is presented to provide
additional information about the Company's ability to meet its future
requirements for debt service. See the Consolidated Statements of Cash Flows
incorporated by reference in this Prospectus.
(5) For purposes of determining the ratio of earnings to fixed charges and the
ratio of earnings to fixed charges and preferred dividend requirements, (i)
earnings consist of income before federal and foreign income taxes plus
fixed charges; (ii) fixed charges consist of interest charges on all
indebtedness, including the portion of rental expense that is representative
of the interest factor; and (iii) preferred dividend requirements include
the dividends on all classes of preferred stock adjusted to a pre-tax basis.
29
<PAGE>
MANAGEMENT'S DISCUSSION OF
PRO FORMA CONDENSED FINANCIAL STATEMENTS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, OTHER INFORMATION INCLUDED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, INCLUDING THE UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS AND THE NOTES THERETO. CERTAIN STATEMENTS IN THE
FOLLOWING DISCUSSION ARE FORWARD-LOOKING STATEMENTS OR DISCUSSIONS OF TRENDS
WHICH BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES THAT COULD
SIGNIFICANTLY AFFECT EXPECTED RESULTS. ACTUAL RESULTS AND TRENDS IN THE FUTURE
MAY DIFFER MATERIALLY FROM THOSE DESCRIBED HEREIN DEPENDING ON A VARIETY OF
FACTORS, INCLUDING THOSE DETAILED UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS.
The unaudited Pro Forma Condensed Financial Statements give effect to (i)
the consummation of the MRA; (ii) the consummation of the Offering; (iii) the
issuance of approximately 42.9 million shares of Common Stock to the IPP
Parties; and (iv) the principal terms of the PowerChoice Agreement, including
the first year impact of a three year rate reduction intended to reduce the
Company's revenues by $111.8 million (exclusive of reductions in the GRT) by the
time it is fully phased in over three years, and the establishment of the MRA
Regulatory Asset which will be amortized by the Company generally over ten
years. The unaudited Pro Forma Condensed Financial Statements do not give effect
to the Genco Divestiture or certain elements of the PowerChoice Agreement that
are not material to the financial results of the Company. The Company is unable
at this time to predict either the timing of the Genco Divestiture or the amount
of proceeds that the Company will receive. In the event that unacceptable bids
are received for any or all of the generating facilities, the Company may spin
off such assets to its shareholders. The net book value of the fossil and hydro
generating facilities at March 31, 1998 was approximately $1.1 billion.
On a pro forma basis after giving effect to the consummation of the MRA and
the Offering, and the principal terms of the PowerChoice Agreement excluding the
Genco Divestiture, the Company's revenues for the year ended December 31, 1997,
the three months ended March 31, 1998 and the twelve months ended March 31, 1998
would have declined by approximately $96.1 million, $24.0 million and $96.1
million, respectively, to $3.9 billion, $1.1 billion and $3.8 billion,
respectively. On a historical basis, the Company's revenues were $4.0 billion,
$1.1 billion and $3.9 billion, respectively, for such periods. This reduction in
revenues reflects the first year's phase-in of a three year rate reduction
intended to reduce the Company's electric revenues by $111.8 million (exclusive
of reductions in the GRT) by the time it is fully phased in over three years, as
well as a deferral of revenues required by the PSC Order representing the
difference between the assumed weighted average interest rate for the Series A
through G Notes used by the Company in preparing its PowerChoice proposal as
compared to the actual weighted average interest rate for the same. The actual
rate reductions and level of revenues in 1998 and other years will be dependent
upon numerous factors such as the volume of electricity sold and the timing of
the rate reductions.
Pursuant to the MRA, 18 PPAs representing approximately 1,100 MW of electric
generating capacity are to be terminated. Such electric generating capacity will
be replaced with purchases in the spot market for electricity at prices
significantly less than the contracted prices under such terminating PPAs. In
addition, eight PPAs representing approximately 541 MW of electric generating
capacity will be restated and amended 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. 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. As a result, on a pro forma basis, the Company's cost of electricity
purchased from the IPPs for the year ended December 31, 1997, the three months
ended March 31, 1998 and the twelve months ended March 31, 1998 would have
declined by approximately $521.5 million, $128.9 million and $515.5 million,
respectively, to $584.5 million, $171.1 million and $592.2 million,
respectively. On a historical basis, the Company's cost of electricity purchased
from the IPPs was $1.1 billion, $300.0 million and $1.1 billion, respectively,
for such periods.
30
<PAGE>
Pursuant to the PowerChoice Agreement, the compensation paid to the IPP
Parties in the form of cash and Common Stock will be capitalized and carried on
the Company's balance sheet as the MRA Regulatory Asset. The net amount which
will be initially recorded and subsequently amortized generally over a ten year
period has been limited by the PSC to approximately $4.0 billion. On a pro forma
basis, the amortization of the MRA Regulatory Asset would have amounted to
$378.0 million, $94.5 million and $378.0 million for the year ended December 31,
1997, the three months March 31, 1998 and the twelve months ended March 31,
1998, respectively. No such amortization charge was recorded in the historical
income statements for such periods.
The Company's operating income on a pro forma basis would have increased by
$47.4 million, $10.4 million and $41.4 million to $606.2 million, $144.6 million
and $502.6 million, respectively, for the year ended December 31, 1997, the
three months ended March 31, 1998 and the twelve months ended March 31, 1998,
respectively. On a historical basis, the Company's operating income was $558.8
million, $134.3 million and $461.2 million, respectively, for such periods. This
increase reflects the net positive impact resulting from the significant
reduction in the Company's cost of electricity purchased from the IPPs which
more than offsets the decline in revenues and amortization of the MRA Regulatory
Asset.
The estimated additional interest charges and amortization of debt issuance
costs associated with the Offering and usage of the Company's receivables
facility would have increased interest charges on a pro forma basis by
approximately $248.5 million, $61.0 million and $244.1 million to $522.4
million, $126.6 million and $516.1 million, respectively, for the year ended
December 31, 1997, the three months ended March 31, 1998 and the year ended
March 31, 1998. On a historical basis, the Company recorded interest charges of
$273.9 million, $65.6 million and $272.0 million, respectively, for such
periods.
The Company's net income on a pro forma basis would have declined by $134.9
million, $34.0 million and $135.9 million to a net income (loss) of $48.4
million, $(13.6) million and $(35.2) million, respectively, for the year ended
December 31, 1997, the three months ended March 31, 1998 and the twelve months
ended March 31, 1998, respectively. On a historical basis, the Company reported
net income of $183.3 million, $20.4 million and $100.7 million, respectively,
for such periods. This decline in net income reflects the above described
decrease in revenues, the amortization of the MRA Regulatory Asset and an
increase in interest charges, which more than offset the decrease in the cost of
electricity purchased from the IPPs.
As a result of the MRA, the Company would have recognized and deducted in
the current year for income tax purposes, an amount representing the total
compensation paid to the IPP Parties, including the cash and market value of the
Common Stock issued to the IPP Parties. This deduction would have created a net
operating loss which would have been carried back two years resulting in a
federal income tax refund and would have been carried forward to effectively
reduce federal income taxes paid in future years. The impact of such NOL would
have been to increase the amount of cash available to the Company until such NOL
is fully utilized.
LIQUIDITY AND CAPITAL RESOURCES
The Pro Forma Condensed Financial Statements demonstrate significant
improvement in the Company's liquidity and capital resources by comparison to
the Company's historical financial statements. Under the MRA, the Company is
able to replace long-term escalating payment obligations to the IPP Parties with
the indebtedness represented by the Offering and a portfolio of restated or
amended shorter-term PPAs with pricing and terms that are more favorable than
the existing PPAs that are subject to the MRA. On a pro forma basis, the
Company's EBITDA would increase by $465.2 million, $114.8 million and $459.2
million to $1.4 billion, $337.1 million, and $1.3 billion, respectively, for the
year ended December 31, 1997, the three months ended March 31, 1998 and the
twelve months ended March 31, 1998, respectively. On a historical basis, the
Company's EBITDA was $961.5 million, $222.3 million and $859.7 million,
respectively, for such periods. This change results primarily from a decrease in
the cost of electricity purchased from the IPPs due to the termination,
restatement or amendment of PPAs pursuant
31
<PAGE>
to the MRA. In addition, the Company would have available additional borrowings
of $275.0 million under the Credit Facility and, under the financial covenants
set forth in the Indenture, will have the ability to incur up to an additional
$1.5 billion of indebtedness.
The Company's principal short-term and long-term liquidity requirements are
expected to consist of the payment of interest on and retirement of the First
Mortgage Bonds and the indebtedness represented by the Offering, the payment of
dividends on and the redemption of the Company's Preferred Stock and capital
expenditures required to maintain the Company's transmission and distribution
systems. In addition, the Company is currently negotiating to extend the
expiration of its Credit Facility from June 30, 1999 to August 1, 2000. The
Company anticipates that internally generated funds will be sufficient to meet
its capital expenditure requirements, provide for the payment of interest
charges and preferred dividends and the retirement of debt and preferred stock
at maturity, and enable the Company to meet other contingencies that may occur,
such as compliance with environmental regulation.
32
<PAGE>
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 GRT) 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 Offering is expected to occur concurrently with and is
contingent upon the closing of the MRA. Pursuant to the MRA, the Company has
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. The Common Stock to be received by the IPP Parties will
represent approximately 23% of the Company's outstanding shares following such
issuance. The cash payment to the IPP Parties will be funded from the proceeds
of the Offering together with cash on hand. 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 will be 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 will be 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 will be 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 will have shorter terms (ten years) and will be
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 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
33
<PAGE>
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.
Upon consummation of the MRA, the IPP Parties are expected to own up to
approximately 42.9 million shares of the Common Stock, representing up to 23% of
the Company's voting securities. Pursuant to the MRA, any IPP Party that
receives 2% or more of the outstanding Common Stock and any designee of IPP
Parties that receives more than 4.9% of the outstanding Common Stock upon the
consummation of the MRA will, together with certain but not all affiliates
(collectively, "2% Shareholders"), enter 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. The terms of the MRA have
been amended so that the Company will sell some portion of the 42.9 million
shares of Common Stock to the public and deliver the net proceeds to the IPP
Parties.
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
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 Series A through G Notes.
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.
34
<PAGE>
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, and other expenses related to the MRA. The ultimate amount of the
MRA Regulatory Asset may vary based on certain events related to the closing of
the MRA. Because the value of the consideration to be paid to the IPP Parties
can only be determined at the closing of the MRA, the value of the limitation on
the recoverability of the MRA Regulatory Asset is expected to be recorded as a
charge to expense in the second quarter of 1998 upon the MRA closing. The charge
to expense will be determined as the difference between $8 per share and the
Company's closing Common Stock price on the date the MRA closes. Using the
Company's Common Stock price on June 16, 1998 of $14 9/16 per share, the charge
to expense would be approximately $281.5 million.
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 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 is seeking approval from its shareholders for the
formation of a holding company. The implementation of a holding company
structure, if approved by the Company's shareholders, would only occur following
various regulatory approvals.
35
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture to be entered into between
the Company and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee").
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"). The Notes are subject to all such terms, and
prospective purchasers of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein of
certain terms used below. A copy of the proposed form of Indenture has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The definitions of certain capitalized terms used in the Indenture and in
the following summary are set forth below under "--Definitions."
The Notes will be senior unsecured obligations of the Company and will rank
PARI PASSU in right of payment to all existing and future Senior Indebtedness of
the Company. Upon completion of the offering hereunder, the Company will have
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 Credit Facility, which are secured with First Mortgage
Bonds, $20.0 million of unsecured Medium Term Notes and the Notes. In addition,
the Company will have available up to an additional $275.0 million under the
Credit Facility. Upon completion of the Offering, the Company will not have any
outstanding Subordinated Indebtedness. Under the Indenture, the Company may in
the future issue additional First Mortgage Bonds, including in connection with a
refinancing of the Credit Facility, and additional series of Notes, as well as
Subordinated Indebtedness, subject to certain exceptions described below.
PRINCIPAL, MATURITY AND INTEREST
The Indenture permits the Company to issue Notes in one or more series and
in an unlimited amount. Except for the Notes offered hereby, each series of
Notes will be created and established by a Supplemental Indenture which shall
specify the terms of such Notes.
SERIES A THROUGH G NOTES
Each series of Notes offered hereby will be limited in aggregate principal
amount, will mature on (i) July 1, in the case of Series A, C and E Notes, and
(ii) October 1, in the case of Series B, D, F and G Notes, of the year, and will
bear interest at the rate set forth opposite such series below:
<TABLE>
<CAPTION>
INTEREST
SERIES PRINCIPAL AMOUNT RATE MATURITY
- ---------- ---------------- ------------ -----------
<S> <C> <C> <C>
Series A $300.0 million 6.500% 1999
Series B $450.0 million 7.000% 2000
Series C $400.0 million 7.125% 2001
Series D $400.0 million 7.250% 2002
Series E $400.0 million 7.375% 2003
Series F $400.0 million 7.625% 2005
Series G $600.0 million 7.750% 2008
</TABLE>
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<PAGE>
Interest on the Series A, C and E Notes will be payable in cash
semi-annually in arrears on January 1 and July 1 of each year, commencing on
January 1, 1999, to holders of record on the immediately preceding December 15
and June 15. Interest on the Series B, D, F and G Notes will be payable in cash
semi-annually in arrears on April 1 and October 1 of each year, commencing on
October 1, 1998, to holders of record on the immediately preceding March 15 and
September 15. Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. The Series A through G Notes will be issued
in denominations of $1,000 and integral multiples thereof.
SENIOR DISCOUNT NOTES
The Senior Discount Notes initially will be limited in aggregate principal
amount at maturity to $500.0 million and will mature on July 1, 2010. The Senior
Discount Notes will be issued at a substantial discount from their principal
amount at maturity in order to generate gross proceeds of $328.4 million. Until
July 1, 2003, no interest will accrue on the Senior Discount Notes, but the
Accreted Value will increase (representing amortization of original issue
discount) between the date of original issuance and July 1, 2003, on a
semi-annual bond equivalent basis using a 360-day year comprised of twelve
30-day months, such that the Accreted Value shall be equal to the full principal
amount at maturity of the Senior Discount Notes on July 1, 2003. Thereafter,
interest on the Senior Discount Notes will accrue at the rate of 8.500% per
annum and will be payable in cash semi-annually in arrears on January 1 and July
1 of each year, commencing on January 1, 2004. Interest on the Senior Discount
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from July 1, 2003. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months. The Senior
Discount Notes will be issued in denominations of $1,000 and integral multiples
thereof.
MANDATORY REDEMPTION
Except as provided under "--Change of Control," the Company is not required
to make mandatory repurchase, redemption or sinking fund payments with respect
to the Notes prior to maturity. Under certain circumstances, the Company may be
required to make an offer to repurchase the Notes. See "Certain
Covenants--Proceeds of Certain Asset Sales."
OPTIONAL REDEMPTION
The Notes in Series A through G will be redeemable at the option of the
Company at any time, in whole or in part, upon not less than 30 nor more than 60
days' notice, in cash at a redemption price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, through the
applicable redemption date plus the Make-Whole Premium. The Senior Discount
Notes will be redeemable at the Company's option prior to July 1, 2003 at any
time, in whole or in part, upon not less than 30 and not more than 60 days'
notice, in cash at a redemption price equal to 100% of the Accreted Value
thereof plus the Make-Whole Premium. On or after July 1, 2003, the Company, at
its option, may redeem, in whole or in part, the Senior Discount Notes, upon not
less than 30 nor more than 60 days' notice, in cash at the respective redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest thereon through the applicable redemption date, if
redeemed during the twelve-month period beginning on July 1 of the years
indicated below.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------------------------------------------------------- -----------
<S> <C>
2003.................................................................................. 104.250%
2004.................................................................................. 102.833%
2005.................................................................................. 101.417%
2006 and thereafter................................................................... 100.000%
</TABLE>
37
<PAGE>
SPECIAL REDEMPTION
Notwithstanding the Optional Redemption provisions above, the Company may,
at its option, by delivering a notice of redemption at any time during the
period from April 1, 1999 through December 31, 2000, use the Net Proceeds from
any sale or sales of Fossil and Hydro Generating Assets to redeem up to $500.0
million aggregate principal amount of the Notes in Series B through F at a cash
redemption price equal to 100% of the principal amount thereof plus accrued
interest thereon, if any, to the date of redemption. The Company shall effect a
redemption of Notes pursuant to this provision such that, following such
redemption, the percentage of Notes in each of Series B through F that remain
outstanding (calculated for each series by dividing the aggregate principal
amount of Notes outstanding by the aggregate principal amount of Notes
originally issued) is as near to identical as reasonably practicable. Any such
redemption must occur within 120 days following the receipt by the Company of
the Net Proceeds that are being used to effect the redemption.
SELECTION AND NOTICE
If less than all the Notes in any series are to be redeemed at any time,
selection of Notes of such series for redemption will be made by the Trustee, on
a pro rata basis, by lot or in accordance with any other method the Trustee
considers fair and appropriate; provided that no Notes in denominations of
$1,000 or less shall be redeemed in part. Notices of redemption shall be mailed
by first class mail at least 30 but not more than 60 days prior to the
redemption date to each holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on the Notes or portions thereof called for redemption.
CHANGE OF CONTROL
No earlier than 30 days nor later than 60 days after the date upon which the
Company mails a written notice to the holders of the occurrence of a Change of
Control Triggering Event, each holder of Notes will have the right to require
the Company to repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of such holder's Notes pursuant to an offer by the Company
(the "Change of Control Offer") at an offer price in cash equal to (a) 101% of
the aggregate principal amount thereof in the case of the Series A through G
Notes, or (b) 101% of the Accreted Value of the Senior Discount Notes (if such
repurchase occurs prior to July 1, 2003) or (c) 101% of the principal amount at
maturity of the Senior Discount Notes (if such repurchase occurs on or after
July 1, 2003), plus accrued and unpaid interest thereon, if any, through the
date of purchase. The Company will mail or cause to be mailed notice of the
Change of Control Offer to each holder of the Notes within 30 days following any
Change of Control Triggering Event, which will (i) state that a Change of
Control Offer is being made and that all Notes tendered will be accepted for
payment and (ii) offer to repurchase the Notes during the time period and for
the purchase price referred to above pursuant to the procedures required by the
Indenture and described in such notice.
The Company's ability to pay cash to the holders of the Notes upon a
repurchase may be limited by the Company's then existing financial resources.
There can be no assurance that the Company will have sufficient funds to
repurchase the Notes following a Change of Control Triggering Event. Except as
described above with respect to a Change of Control Triggering Event, the
Indenture does not contain provisions that permit the holder of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar restructuring, including highly leveraged
transactions that could reduce the creditworthiness of the Company.
The Company will comply with the requirements of Rule 14e-1 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any other
securities laws and regulations thereunder to the
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<PAGE>
extent such laws and regulations are applicable in connection with any
repurchase or redemption of the Notes as a result of a Change of Control
Triggering Event.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture will provide that, prior to the Investment Grade Date, the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, (i) declare or pay any dividend or make any cash
dividend or other distribution on account of the Company's or any of its
Restricted Subsidiaries' Equity Interests, including, without limitation, any
payment in connection with any merger or consolidation involving the Company
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or any portion of a dividend or distribution
by a Restricted Subsidiary of the Company that is payable to the Company or to
any Wholly-Owned Restricted Subsidiary of the Company); (ii) purchase, redeem or
otherwise acquire or retire for value from any Person other than the Company or
a Wholly-Owned Restricted Subsidiary any Equity Interests of the Company, any of
its Subsidiaries or any direct or indirect parent of the Company (other than the
conversion or exchange of Equity Interests of the Company for other Equity
Interests of the Company); (iii) make any principal payment on, or purchase,
redeem, defease or otherwise acquire or retire for value any Subordinated
Indebtedness, except at final maturity; or (iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payments:
(A) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(B) except in the case of a Restricted Investment, the Company would, at the
time of such Restricted Payment, and after giving PRO FORMA effect thereto as if
such Restricted Payment had been made at the beginning of the applicable
four-quarter period, have a Fixed Charge Coverage Ratio of not less than 1.75 to
1 (calculated as described below under the caption "--Incurrence of
Indebtedness"); and
(C) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries after
the Initial Issuance Date (excluding Restricted Payments permitted by clauses
(iii), (iv), (v), (vi) or (vii) of the next succeeding paragraph), is less than
the sum of (i) $50,000,000, PLUS (ii) 25% of an amount equal to the Operating
Cash Flow of the Company for the period (taken as one accounting period) from
the day after the Initial Issuance Date through the end of the Company's most
recently ended fiscal quarter for which financial statements are available at
the time of such Restricted Payment (or, if such Operating Cash Flow for such
period is a deficit, less 100% of such deficit), PLUS (iii) 100% of the
aggregate net cash proceeds received by the Company from the issuance or sale
(other than pursuant to or in connection with the IPP Buyout) after the Initial
Issuance Date of Equity Interests of the Company or of debt securities of the
Company that have been converted into Equity Interests of the Company, PLUS (iv)
100% of the aggregate cash proceeds received by the Company from any payment in
respect of any previously made Restricted Investment (but only to the extent
that such amount is not reflected in Consolidated Net Income).
The foregoing provisions will not prohibit (i) the payment of dividends,
whether paid in kind or in cash, or the satisfaction of mandatory redemption
obligations, in respect of any Preferred Stock outstanding on the Initial
Issuance Date in accordance with the terms thereof; (ii) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of the
Indenture; (iii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of
the substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of, other Equity Interests of the Company; (iv) the defeasance,
redemption or repurchase of Subordinated Indebtedness with the net cash proceeds
of the substantially concurrent sale (other than to a Restricted Subsidiary of
the
39
<PAGE>
Company) of Equity Interests of the Company or from an incurrence of Permitted
Refinancing Indebtedness that consists of Subordinated Indebtedness; PROVIDED,
that the amount of any net cash proceeds that are utilized for any redemption,
repurchase, retirement or other acquisition described in clauses (iii) and (iv)
shall be excluded from clause (C) (iii) of the first paragraph of this covenant;
(v) the repurchase, redemption or other acquisition or retirement for value of
any Equity Interests of the Company or any Restricted Subsidiary of the Company
held by any member of the Company's (or any of its Restricted Subsidiaries')
management or for the purpose of providing Equity Interests for issuance under
dividend reinvestment or employee benefits plans of the Company; (vi) any
spin-off or other distribution to shareholders of the Generating Assets or the
Oswego Plant or any portion thereof or any direct or indirect interest therein;
and (vii) any dividend or other distribution of the Capital Stock of any
Unrestricted Subsidiary; PROVIDED, that in the case of each of clauses (i) and
(ii) above, no Default or Event of Default shall have occurred and be continuing
immediately after such transaction.
Not later than the date of making any Restricted Payment that relies on
clause (C) of the first paragraph of this covenant to be permitted, and so long
as the limitations contained in such clause apply, the Company shall deliver to
the Trustee an officer's certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
such covenant were computed, which calculations may be based upon the Company's
latest available financial statements.
INCURRENCE OF INDEBTEDNESS
The Indenture will provide that, prior to the Investment Grade Date, the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guaranty or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur"), any Indebtedness (including Acquired Debt) or issue any
Disqualified Stock; PROVIDED, HOWEVER, that the Company and any of its
Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) and
issue Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which financial statements are
available immediately preceding the date on which such Indebtedness is incurred
or Disqualified Stock is issued would have been at least 3.25 to 1, determined
on a PRO FORMA basis (including a PRO FORMA application of the net proceeds
therefrom), as if such Indebtedness had been incurred or such Disqualified Stock
had been issued at the beginning of such four-quarter period.
The foregoing provisions will not apply to (i) Permitted Refinancing
Indebtedness; (ii) the incurrence by the Company of any amount of Subordinated
Indebtedness if the Fixed Charge Coverage Ratio for the Company's most recently
ended four full fiscal quarters for which financial statements are available
immediately preceding the date on which such Subordinated Indebtedness is
incurred would have been at least 1.75 to 1 (determined as above); (iii)
Permitted Hedging Agreements; (iv) borrowings under the Credit Facility in an
amount not to exceed $804.4 million; and (v) intercompany Indebtedness between
and among the Company and any of its Restricted Subsidiaries (except in a TIPES
Transaction); PROVIDED, HOWEVER, that (A) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a Person
other than a Restricted Subsidiary and (B) any sale or other transfer of any
such Indebtedness to a Person that is not either the Company or a Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case may be.
LIENS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, secure with a
Lien on the property or assets of the Company or such Restricted Subsidiary,
Other Indebtedness or Subordinated Indebtedness without making, or causing such
Restricted Subsidiary to make, effective provision for securing the Notes (i) in
the case of a Lien securing Other Indebtedness, on an equal and ratable basis
with the Lien securing such Other Indebtedness and
40
<PAGE>
(ii) in the case of a Lien securing Subordinated Indebtedness, on a basis such
that the Lien securing the Notes is senior in priority to the Lien securing such
Subordinated Indebtedness, in each case until such time as such Other
Indebtedness or Subordinated Indebtedness is no longer secured by a Lien. Under
this covenant, the Company will be permitted to refinance or replace the full
amount of First Mortgage Bonds outstanding on the Initial Issuance Date, the
Credit Facility and the Receivables Financing, and to enter into the
Securitization Transaction, without securing the Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any such Restricted Subsidiary to (a)(i) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (A) on its Capital Stock or (B) with respect to any
other interest or participation in, or measured by, its profits or (ii) pay any
Indebtedness owed to the Company or any of its Restricted Subsidiaries, (b) make
loans or advances to the Company or any of its Restricted Subsidiaries or (c)
transfer any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (i) the First Mortgage Bonds, the Credit Facility, the Receivables
Financing, the Pollution Control Obligations, the Securitization Transaction,
the Indenture and the Notes; (ii) applicable law or regulation; (iii) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so acquired;
(iv) by reason of customary non-assignment provisions in leases entered into in
the ordinary course of business and consistent with past practice; (v) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (c) above in the property
so acquired; (vi) any contract for the sale of 100% of the Capital Stock of a
Restricted Subsidiary; or (vii) Permitted Refinancing Indebtedness, PROVIDED
that the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture will provide that so long as the Notes are outstanding the
Company may not, directly or indirectly, consolidate or merge with or into
(whether or not the Company is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all its
assets in one or more related transactions, to another Person unless (i) the
corporation formed by such consolidation or surviving in such merger or the
Person that acquires by sale, assignment, transfer, conveyance or other
disposition, or that leases, such assets (in each such case, the "Successor
Entity), is a corporation organized and existing under the laws of the United
States, any State thereof or the District of Columbia and expressly assumes the
Company's obligations under the Indenture and the Notes; (ii) immediately before
and after such transaction no Default or Event of Default exists; and (iii) the
Successor Entity (or the Company, in the case of a consolidation or merger in
which the Company is the surviving entity) (A) has Consolidated Net Worth
immediately after the transaction (but prior to any revaluation or recalculation
of Consolidated Net Worth as of the date of the transaction relating to a
carry-over basis (if any) of the assets acquired in the transaction (as
determined in accordance with GAAP)) equal to or greater than the Consolidated
Net Worth of the Company immediately prior to the transaction and (B) will, at
the time of such transaction and after giving PRO FORMA effect thereto as if
such transaction had occurred at the beginning of the applicable four-quarter
period, have a Fixed Charge Coverage Ratio of not less than 1.75 to 1
(calculated as described above under the caption "--Incurrence of
Indebtedness);" PROVIDED, that the limitations set forth in this clause (iii)
shall not apply following the Investment Grade Date or to any merger or
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<PAGE>
consolidation of the Company with or into a Restricted Subsidiary and PROVIDED
FURTHER, that the limitations set forth above shall not apply to the sale or
disposition by the Company of its Generating Assets or the Oswego Plant.
PROCEEDS OF CERTAIN ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, engage in a (A) Permitted Asset Swap
unless the Company or Restricted Subsidiary receives property or assets with a
Fair Value at least equal to the Fair Value of the property or assets swapped,
(B) Sale of Assets unless (i) the Company or Restricted Subsidiary receives
consideration at least equal to the Fair Value of the assets or Equity Interests
issued or sold or otherwise disposed of and (ii) except in connection with a
sale of the Nuclear Generating Assets or the Oswego Plant, at least 75% of the
consideration received therefor by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents, PROVIDED, that if in the case of the
sale of any Fossil and Hydro Generating Assets pursuant to the PowerChoice
Agreement, the Board of Directors determines in good faith that the Company will
receive the highest price by accepting a bid with consideration consisting of
less than 75% cash or Cash Equivalents, and the PSC approves the Company's
acceptance of such bid, then the Company may accept such bid and PROVIDED,
FURTHER, that in the case of any Sale of Assets (except a Securitization
Transaction) that is consummated after the Investment Grade Date, the
requirement of clause (ii) shall not apply. Within 180 days after the receipt of
any Net Proceeds from a Securitization Transaction or a Sale of Assets
consisting of Generating Assets, or within 360 days after the receipt of any Net
Proceeds from any other Sale of Assets that is consummated prior to the
Investment Grade Date, the Company is required (a) in the case of a
Securitization Transaction, to apply the cash portion of such Net Proceeds in
accordance with the relevant statutory or regulatory requirements that govern
such transaction or, if there are no such requirements, to reduce Senior
Indebtedness, (b) in the case of a sale or other disposition of Generating
Assets or the Oswego Plant, to use not less than 85% (or 100% if the accepted
bid requires less than 75% of the purchase price to be paid in cash or Cash
Equivalents) of the cash portion of such Net Proceeds to reduce Senior
Indebtedness and (c) in the case of any other Sale of Assets that is consummated
prior to the Investment Grade Date, to use 100% of the cash portion of such Net
Proceeds for one or more of the following: (x) to reduce Senior Indebtedness,
(y) to reinvest, or enter into an agreement with respect to the reinvestment of,
such Net Proceeds in Related Assets, or (z) make an offer to all holders to
purchase Notes at a price in cash in an amount equal to 100% of the principal
amount thereof (in the case of the Series A through G Notes), 100% of the
Accreted Value of the Senior Discount Notes (if such repurchase occurs prior to
July 1, 2003) or 100% of the principal amount at maturity of the Senior Discount
Notes (if such purchase occurs on or after July 1, 2003), plus accrued and
unpaid interest thereon, if any, to the date of purchase, in accordance with the
procedures set forth in the Indenture. If such an offer is not fully subscribed,
the Company will be free to use the remaining proceeds in any manner permitted
by the Indenture.
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make any contract, agreement,
understanding, loan, advance or Guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Subsidiary than those that would have been obtained in a comparable
transaction by the Company or Subsidiary with an unrelated Person and (b) the
Company delivers to the Trustee (i) with respect to any Affiliate Transaction or
any series of related Affiliate Transactions involving aggregate consideration
in excess of $10.0 million a resolution of the Board of Directors set forth in
an officer's certificate certifying that such Affiliate Transaction complies
with clause (a) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Board of Directors; and
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<PAGE>
(ii) with respect to any Affiliate Transaction or any series of related
Affiliate Transactions involving aggregate consideration in excess of $50.0
million, an opinion as to the fairness to the Company or such Subsidiary of such
Affiliate Transaction from a financial point of view issued by a nationally
recognized expert in evaluating such transactions; PROVIDED that (v) any
employment agreement entered into by the Company or any of its Subsidiaries in
the ordinary course of business, (w) commercial transactions in the ordinary
course of the utility business between or among the Company and/or its
Restricted Subsidiaries, (x) transactions permitted by the provisions of the
Indenture described above under the caption "-- Restricted Payments," (y)
agreements or transactions entered into in connection with a Securitization
Transaction or the Receivables Financing and (z) following any holding company
reorganization, transactions between the Company and its Restricted Subsidiaries
and the Company's parent that are on terms permitted by the PSC, in each case,
shall not be deemed Affiliate Transactions.
PAYMENTS FOR CONSENT
The Indenture will provide that neither the Company nor any of it its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
the Notes of any series for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indenture or such Notes
unless such consideration is offered to be paid or agreed to be paid to all
holders of the Notes of such series that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
REPORTS
The Indenture will provide that the Company shall file with the Trustee,
within 15 days of filing them with the Securities and Exchange Commission (the
"Commission"), copies of the current, quarterly and annual reports and of the
information, documents and other reports (or copies of such portions of any of
the foregoing as the Commission may by rules and regulations prescribe) that the
Company is required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act. If the Company is not subject to the requirements of
Section 13 or 15(d) of the Exchange Act, the Company shall nevertheless file
with the Commission and the Trustee, on the date upon which it would have been
required to file with the Commission, current, quarterly and annual financial
statements, including any notes thereto (and with respect to annual reports, an
auditor's report by a firm of established national reputation, upon which the
Trustee may conclusively rely), and a "Management's Discussion and Analysis of
Financial Condition and Results of Operations," both comparable to that which
the Company would have been required to include in such current, quarterly and
annual reports, information, documents or other reports on Forms 8-K, 10-Q and
10-K if the Company were subject to the requirements of Section 13 or 15(d) of
the Exchange Act, PROVIDED that the Company shall not be required to register
under the Exchange Act by virtue of this provision, if not otherwise required to
do so.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that the occurrence of any of the following
constitutes an Event of Default: (i) default for 60 days in the payment when due
of interest on any of the Notes; (ii) default in the payment when due of the
principal of, or premium, if any, on, the Notes; (iii) failure by the Company to
comply with the provisions described under the captions "--Restricted Payments,"
"--Incurrence of Indebtedness" or "--Merger, Consolidation, or Sale of Assets",
(iv) failure by the Company for 60 days after notice by the Trustee or to the
Company and Trustee by the holders of 25% or more in aggregate principal amount
(or principal amount at maturity, as the case may be) of Notes to comply with
any of its other agreements in the Indenture or the Notes; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness of the Company or of any of
its Restricted Subsidiaries (or the payment of which is Guaranteed by the
Company or by any of its Restricted Subsidiaries) whether such Indebtedness or
Guarantee now exists or is created after the date of the Indenture, which
default (a) is caused by a failure to pay the principal of such Indebtedness at
the
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stated maturity of such Indebtedness after the expiration of grace periods
provided in such indebtedness (a "Payment Default") or (b) has resulted in the
acceleration of such Indebtedness prior to its stated maturity; and, in each
case the principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a Payment
Default or the maturity of which has been so accelerated, aggregates $50.0
million or more; (vi) failure by the Company or any of its Restricted
Subsidiaries to pay one or more final judgments not otherwise covered by
insurance aggregating in excess of $50.0 million not otherwise covered and
payable by insurance, which judgments are not paid, discharged or stayed for a
period of 60 days; or (vii) certain events of bankruptcy or insolvency with
respect to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in aggregate principal amount (or principal amount at maturity,
as the case may be) of the then outstanding Notes of any series affected by an
Event of Default may declare all the Notes of such series to be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency with respect to the
Company, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations, the
holders of not less than a majority in principal amount (or principal amount at
maturity, as the case may be) of the then outstanding Notes of any series
affected by an Event of Default will have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy available to
the Trustee. The Trustee may withhold from holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding such notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption or Change of Control provisions of the Indenture, an
equivalent premium shall also become and be immediately due and payable to the
extent permitted by law upon the acceleration of the Notes.
The holders of not less than a majority in aggregate principal amount of the
Notes then outstanding which would be materially adversely affected by such
waiver, by notice to the Trustee may on behalf of the holders of all the Notes
so affected waive any existing Default or Event of Default and its consequences
under the Indenture, except an Event of Default in the payment of principal of,
premium, if any, or interest on the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No past, present or future director, officer, employee, incorporator or
shareholder of the Company, as such, shall have any liability for any
obligations of the Company under the Notes and the Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each holder by accepting a Note waives and releases all such liability as part
of the consideration for issuance of the Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
Commission that such waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture will provide that the Company may, at its option and at any
time, elect to have its obligations discharged with respect to the outstanding
Notes of any series ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire
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indebtedness represented by, and the Indenture shall cease to be of further
effect as to, all outstanding Notes of such series, except as to (i) rights of
holders to receive payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due from the trust funds; (ii) the
Company's obligations with respect to such Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and
the maintenance of an office or agency for payment and money for security
payments held in trust; (iii) the rights, powers, trust, duties, and immunities
of the Trustee, and the Company's obligations in connection therewith; and (iv)
the Legal Defeasance provisions of the Indenture. In addition, the Company may,
at its option and at any time, elect to have its obligations released with
respect to certain covenants that are described in the Indenture or covering the
Notes of any series ("Covenant Defeasance") and thereafter any omission to
comply with such obligations shall not constitute a Default or Event of Default
with respect to the Notes of the affected series. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the Notes
of the affected series.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, U.S. legal tender, noncallable U.S. government
securities or a combination thereof, in such amounts as will be sufficient, in
the opinion of a firm of independent public accountants nationally recognized in
the United States, to pay the principal of, premium, if any, and interest on
such Notes on the stated date for payment thereof or on the redemption date of
such principal or installment of principal of, premium, if any, or interest on
such Notes, and the holders of Notes must have a valid, perfected, exclusive
security interest in such trust; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the United States Internal Revenue Service, a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable U.S. federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the holders of such
Notes will not recognize income, gain or loss for U.S. federal income tax
purposes as a result of such Legal Defeasance and will be subject to U.S.
federal income tax on the same amounts, in the same manner, and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel reasonably acceptable to such Trustee
confirming that the Holders of such Notes will not recognize income, gain or
loss for U.S. federal income tax purposes as a result of such Covenant
Defeasance and will be subject to U.S. federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
Covenant Defeasance has not occurred; (iv) no Default or Event of Default shall
have occurred and be continuing on the date of such deposit or insofar as Events
of Default from bankruptcy or insolvency events are concerned, at any time in
the period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance shall not result in a breach or violation of,
or constitute a default under the Indenture or any other material agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an officers' certificate stating that the deposit
was not made by the Company with the intent of preferring the holders of such
Notes over any other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding any other creditors of the Company or others;
and (vii) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that the conditions
precedent provided for in, in the case of the officers' certificate, (i) through
(vi) and, in the case of the opinion of counsel, clauses (i) (with respect to
the validity and perfection of the security interest), (ii), (iii) and (v) of
this paragraph have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented, and the Company and the Trustee may
enter into Supplemental Indentures,
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and any existing default or compliance with any provision of the Indenture or
the Notes may be waived, with the consent of the holders of not less than a
majority in principal amount (or principal amount at maturity, as the case may
be) of the then outstanding Notes (including consents obtained in connection
with a tender offer or exchange offer for Notes); PROVIDED, HOWEVER, that if
there shall be Notes of more than one series outstanding and if the proposed
action to be taken will materially adversely affect the rights of holders of
Notes of one or more of such series, then the consent (including consents
obtained in connection with a tender offer or exchange offer for Notes) only of
the holders of a majority in aggregate principal amount (or principal amount at
maturity, as the case may be) of outstanding Notes of all series so affected,
considered as one class, shall be required.
Without the consent of each holder affected an amendment or waiver may not
(with respect to any Note held by a non-consenting holder); (i) reduce the
principal amount (or principal amount at maturity, as the case may be) of Notes
whose holders must consent to an amendment, supplement or waiver; (ii) reduce
the principal or change the maturity of any Note or alter or waive the
provisions with respect to redemption with respect to any Note except as
permitted by the Indenture; (iii) reduce the rate of or change the time for
payment of interest on any Note; (iv) after the obligation has arisen for the
Company to make an offer to purchase following a Change of Control or Sale of
Assets, alter the obligation to purchase Notes in accordance with such offer to
purchase or waive any default in the performance thereof; (v) waive a Default or
Event of Default in the payment of principal of or interest on the Notes; (vi)
make any Note payable in money other than that stated in any Note; (vii) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of holders of Notes to receive payments of principal or
interest on the Notes; (viii) waive a redemption payment with respect to any
Note; or (ix) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or any Notes
and enter into Supplemental Indentures: (a) to cure any ambiguity, defect or
inconsistency; (b) to secure the Notes on an equal and ratable or senior basis
with Other Indebtedness or Subordinated Indebtedness as required by the
Indenture; (c) to establish and create one or more additional series of Notes
and to specify the terms of such series, pursuant to the Indenture; (d) to
provide that the Company shall not issue any additional Notes or to add
conditions, limitations and restrictions on the Company with respect to any
series of Notes; (e) to add additional covenants and agreements of the Company
to the Indenture, to add additional Events of Default under the Indenture or to
surrender any right or power reserved to or conferred upon the Company pursuant
to the Indenture; (f) to provide for alternative methods or forms for evidencing
and recording the ownership of Notes; (g) to evidence the succession to the
Company by a Successor Entity, or successive successions, and the assumption by
such Successor Entity of the covenants and obligations of the Company under the
Indenture; (h) to make any other change that would provide additional rights or
benefits to the holders of the Notes or that would not adversely affect the
legal rights of such holders; or (i) to comply with the requirements of the
Commission to maintain the qualification of the Indenture under the TIA.
BOOK-ENTRY SYSTEM
Upon issuance, all Notes of the same series will be represented by one or
more global securities (a "Global Security"). Each Global Security will be
deposited with, or on behalf of, the Depository Trust Company (the "Depository")
and registered in the name of a nominee of the Depository. Except under
circumstances described below, book-entry Notes will not be exchangeable for
certificated Notes and will not otherwise be issuable in definitive form.
The Depository has advised the Company that it is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Securities Exchange Act of 1934, as amended. The
Depository holds securities that its participants ("Participants") deposit with
the Depository. The Depository also facilitates the settlement among
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Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities. Direct Participants ("Direct Participants") include securities
brokers and dealers, banks, trust companies, clearing corporations, and certain
other organizations. The Depository is owned by a number of its Direct
Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc., and the National Association of Securities Dealers (the "NASD").
Access to the Depository's system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or maintain a
custodial relationship with a Direct Participant, either directly or indirectly.
The rules applicable to the Depository and its Participants are on file with the
Securities and Exchange Commission.
Upon the issuance of a Global Security, the Depository will credit on its
book-entry registration and transfer system its Participants' accounts with
their respective principal amounts of the Notes represented by such Global
Security. Such accounts shall be designated by the Underwriters with respect to
such Notes. Ownership of beneficial interests in a Global Security will be
limited to Participants or persons that hold interests through Participants.
Ownership of beneficial interests in such Global Security will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by the Depository or its nominee (with respect to interest of Participants) and
on the records of Participants (with respect to interests of persons other than
Participants). The laws of some states may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and laws may impair the ability of a purchaser of an interest in a
book-entry Note to transfer such interest.
So long as the Depository or its nominee is the registered owner of such
Global Security, the Depository or such nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such Global
Security for all purposes under the Indenture. Except as provided below or as
the Company may otherwise agree in its sole discretion, owners of beneficial
interests in a Global Security will not be entitled to have Notes represented by
such Global Security registered in their names, will not receive or be entitled
to receive physical delivery of Notes in definitive form and will not be
considered the owners or holders thereof under the Indenture.
Principal, premium, if any, and interest payments on Notes registered in the
name of the Depository or its nominee will be made to the Depository or its
nominee, as the case may be, as the registered owner of the Global Security
representing such Notes. None of the Company, the Trustee, any paying agent or
the registrar for such Notes will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
interests in such Global Security for such Notes or for maintaining, supervising
or reviewing any records relating to such beneficial interests.
The Company expects that the Depository for the Notes or its nominee, upon
receipt of any payment of principal, premium or interest, will credit
immediately Participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the principal amount of the Global
Security for such Notes as shown on the records of the Depository or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interest in such Global Security held through such Participants will
be governed by standing instructions and customary practices, as is the case
with securities held for the accounts of customers in bearer form or registered
in "street name" (i.e., the name of a securities broker or dealer), and will be
the responsibility of such Participants.
If the Depository is at any time unwilling or unable to continue as
depository and a successor depository is not appointed by the Company within 90
days, the Company will issue Notes in definitive form in exchange for the entire
Global Security representing such Notes. In addition, the Company may at any
time and in its sole discretion determine not to have the Notes represented by
Global Securities and, in such event, will issue Notes in definitive form in
exchange for the Global Securities representing such Notes. In any such
instance, an owner of a beneficial interest in a Global Security will be
entitled to physical delivery in definitive form of Notes represented by such
Global Security equal in principal amount to such beneficial interest and to
have such Notes registered in its name. Notes so issued in definitive form
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will be issued as registered Notes in denominations that are integral multiples
of $1,000, unless otherwise specified by the Company.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest, it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Indenture provides that in case an Event of Default occurs (which is not
cured), the Trustee will be required, in the exercise of its power, to use the
degree of care of a prudent man in the conduct of his own affairs. Subject to
such provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any holder of Notes,
unless such holder will have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for the full definitions of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"ACCRETED VALUE" means, for each $1,000 face amount of Senior Discount Notes
as of any date of determination prior to July 1, 2003, the sum of (a) the
initial offering price of each Senior Discount Note and (b) that portion of the
excess of the principal amount of each Senior Discount Note over such initial
offering price which shall have been accreted thereon through such date, such
amount to be so accreted on a daily basis and compounded semi-annually on each
January 1 and July 1 at the rate of 8.500% per annum from the date of issuance
of the Senior Discount Notes through the date of determination.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person; and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"CAPITAL LEASE OBLIGATION" means, with respect to any Person, at the time
any determination thereof is to be made, the amount of the liability in respect
of a capital lease that would at such time be required to be capitalized on a
balance sheet of such Person in accordance with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, shares of corporate
stock; (ii) in the case of an association or business entity, any and all
shares, interests, participation, rights or other equivalents (however
designated) of corporate stock; (iii) in the case of a partnership, partnership
interests (whether general or limited); and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distribution of assets of, the issuing Person.
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"CASH EQUIVALENTS" means (i) certain U.S. government securities having
maturities of not more than eighteen months from the date of acquisition; (ii)
certificates of deposit and eurodollar time deposits with maturities of eighteen
months or less from the date of acquisition, bankers' acceptances with
maturities not exceeding eighteen months and overnight bank deposits, in each
case with any lender party to the Credit Facility or with any U.S. commercial
bank having capital and surplus in excess of $500 million; (iii) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (i) and (ii) above entered into with any
financial institution meeting the qualifications specified in clause (ii) above;
(iv) commercial paper having either the highest or second highest rating
obtainable from Moody's or S&P and in each case maturing within six months after
the date of acquisition; (v) other corporate debt or asset backed or mortgage
backed securities rated as Investment Grade by S&P or Moody's and which mature
within eighteen months; and (vi) money market mutual funds.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all the assets of the Company and its Restricted Subsidiaries
taken as a whole; (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company; (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" or "group" (as such terms are defined in Sections 13(d)(3)
and 14(d)(2) of the Exchange Act) becomes the "beneficial owner" (as such term
is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of more than 50% of the total voting power in the aggregate of all
classes of Capital Stock of the Company then outstanding normally entitled to
vote in the election of directors; or (iv) the first day on which a majority of
the members of the Board of Directors of the Company or of any Successor Entity
(as defined under the caption "Merger, Consolidation, or Sale of Assets" above)
are not Continuing Directors. For purposes of this definition, the consummation
of a transaction in which the outstanding shares of Common Stock are exchanged
for common stock of a Person that thereafter will be the sole shareholder of the
Company as part of a holding company reorganization will not be deemed to be a
Change of Control.
"CHANGE OF CONTROL TRIGGERING EVENT" means the occurrence of a Change of
Control and a Rating Decline.
"COMMON STOCK" means the Company's common stock, $1.00 par value.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common shareholders (or equity
holders) of such Person and its consolidated Restricted Subsidiaries as of such
date; plus (ii) the respective amounts reported on such Person's balance sheet
as of such date with respect to any series of Preferred Stock that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such Preferred Stock, LESS (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Initial Issuance Date in the book value of
any asset owned by such Person or a Restricted Subsidiary of such Person, (y)
all investments as of such date in Unrestricted Subsidiaries and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all the foregoing determined in accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Initial Issuance Date; or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"CREDIT FACILITY" means the Company's $804.4 million credit facility dated
as of March 20, 1996 with a group of banks and Citibank, as agent, as such
agreement is amended, modified, restated, extended, renewed, replaced or
refinanced from time to time.
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"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
date that is one year after the final maturity of the outstanding series of
Notes with the longest maturity.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"FAIR VALUE" when applied to any property means its fair value to the
Company, which may be determined without physical inspection by use of
accounting and engineering records and other data maintained by, or available
to, the Company; PROVIDED, that the Company delivers a resolution of the Board
of Directors specifying the Fair Value of the assets being sold and, in the
event of a transaction in excess of $50.0 million, the Company also delivers an
opinion of a nationally recognized expert in the valuation of the assets being
sold as to the Fair Value of the assets being sold and that the transaction is
fair to the Company.
"FIRST MORTGAGE BONDS" means the securities and other Indebtedness issued
from time to time pursuant to the Company's Mortgage Trust Indenture dated as of
October 1, 1937 and the supplemental indentures thereto.
"FIXED CHARGE COVERAGE RATIO" of the Company and its Restricted Subsidiaries
means for any period, the ratio of (i) the sum (determined from the consolidated
income statement of the Company and its Restricted Subsidiaries) of (A)
operating income or operating loss of the Company and its Restricted
Subsidiaries, taken as a whole, for such period PLUS (B) depreciation and
amortization (including amortization of goodwill and other intangibles and of
the MRA Regulatory Asset and other non-cash regulatory deferrals and
amortizations) and other non-recurring, non-cash charges of the Company and its
Restricted Subsidiaries for such period to the extent that such deprecation and
amortization and other non-recurring, non-cash charges were deducted in
computing operating income or operating loss, in each case on a consolidated
basis and determined in accordance with GAAP, PLUS (C) provision for taxes based
on income or profits of the Company and its Restricted Subsidiaries for such
period to the extent deducted in determining operating income, to (ii) the sum
of (A) the consolidated interest expense of the Company and its Restricted
Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, non-cash interest payments,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to any sale and leaseback
transactions, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings (unless such
commissions, discounts and other fees and charges have been deducted in
calculating operating income), net payments (if any) pursuant to Hedging
Obligations and any interest paid by the Company or a Restricted Subsidiary
pursuant to a TIPES Transaction; PLUS (B) the consolidated interest expense of
the Company and its Restricted Subsidiaries that was capitalized during such
period; PLUS (C) any interest expense on Indebtedness of another Person that is
Guaranteed by the Company or one of its Restricted Subsidiaries or secured by a
Lien on assets of the Company or one of its Restricted Subsidiaries (whether or
not such Guarantee or Lien is called upon); PLUS (D) the quotient obtained by
dividing all cash dividend or other payments or distributions on or in respect
of any series of Preferred Stock (other than Preferred Stock issued in a TIPES
Transaction), of the Company or any of its Restricted Subsidiaries by 1 minus
the maximum statutory income tax rate then applicable to the Company (expressed
as a decimal), in each case, on a consolidated basis and in accordance with
GAAP. In the event that the Company or any of its Restricted Subsidiaries
incurs, assumes, Guarantees or redeems any Indebtedness (other than revolving
credit borrowings) or issues Preferred Stock subsequent to the commencement of
the period for which the Fixed Charge Coverage Ratio is being calculated but
prior to
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the date on which the event for which the calculation of the Fixed Charge
Coverage Ratio is made, then the Fixed Charge Coverage Ratio shall be calculated
giving PRO FORMA effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of Preferred Stock, as if the
same had occurred at the beginning of the applicable reference period.
"FOSSIL AND HYDRO GENERATING ASSETS" means the Generating Assets other than
the Nuclear Generating Assets.
"GAAP" means generally accepted accounting principles in use at the Initial
Issuance Date or, at the option of the Company, other generally accepted
accounting principles which are in use at the time of their determination; in
determining generally accepted accounting principles, the Company may, but shall
not be required to, conform to any accounting order, rule or regulation of any
regulatory authority having jurisdiction over the electric generating,
transmission or distribution operations of the Company.
"GENERATING ASSETS" means the Company's nuclear, fossil and hydroelectric
generation plants other than the Oswego Plant, and any related asset necessary
for the operation of any such plant and any associated license or permit.
"GRADATION" means a gradation within a Rating Category or a change to
another Rating Category, which shall include "+" and "-", in the case of S&P's
current Rating Categories (e.g., a decline from BB+ to BB would constitute a
decrease of one gradation); "1", "2" and "3", in the case of Moody's current
Rating Categories (e.g. a decline from B1 to B2 would constitute a decrease of
one gradation); or the equivalent in respect of successor Rating Categories used
by Rating Agencies other than S&P or Moody's.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including without limitation, letters of credit,
reimbursement agreements and support, "keep-well" or similar agreements in
respect thereof), of all or any part of any Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under any interest rate, currency or commodity swap agreement,
interest rate, currency or commodity future agreement, interest rate cap or
collar agreement, interest rate, currency or commodity hedge agreement, and any
put, call other agreement or arrangement designed to protect such Person against
fluctuations in interest rates, currency exchange rates or commodity prices.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations of such Person or the balance deferred
and unpaid of the purchase price of any property or representing any Hedging
Obligations of such Person, except any such balance that constitutes an accrued
expense or trade payable, if and to the extent any of the foregoing indebtedness
(other than letters of credit and Hedging Obligations) would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP
(provided, that any debt instrument issued by the Company or a Restricted
Subsidiary in a TIPES Transaction shall be deemed Indebtedness of the Company
regardless of its characterization on any such balance sheet), as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, any Guarantees by such Person of any indebtedness of any
other Person.
"INITIAL ISSUANCE DATE" means the date of closing of the public offering of
the Notes.
"INVESTMENT" means, with respect to any Person, any investment by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances (excluding commission, travel and similar advances to employees made in
the
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ordinary course of business) or capital contributions, purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities and all other items that are or would be classified as investments on
a balance sheet prepared in accordance with GAAP; PROVIDED, HOWEVER, that an
acquisition of assets, Equity Interests or other securities by the Company for
consideration consisting of assets or Capital Stock (other than Disqualified
Stock) shall not be deemed to be an Investment.
"INVESTMENT GRADE" means a rating of BBB- or higher by S&P (or its
equivalent under any successor rating categories of S&P) or the equivalent of
such rating category of any other Rating Agency.
"INVESTMENT GRADE DATE" means the date of delivery by the Company to the
Trustee of an officer's certificate to the effect that the Notes of the series
having the longest maturity then outstanding have been rated Investment Grade by
(i) S&P and Moody's or (ii) S&P or Moody's and at least one other Rating Agency
identified in such certificate.
"IPP BUYOUT" means the termination, restatement or amendment of certain
power purchase agreements in exchange for cash and securities (or the proceeds
of the sale by the Company of securities) pursuant to the terms of the Master
Restructuring Agreement.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
encumbrance, charge or adverse claim affecting title or resulting in a charge
against real or personal property, or a security interest of any kind in respect
of such asset, whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option, other agreement to sell
or give a security interest in and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction).
"MAKE WHOLE PREMIUM" with respect to any Note shall mean with respect to any
prepayment of such Note in circumstances requiring the payment of a Make Whole
Premium, an amount equal to (i) in the case of the Series A through G Notes, the
excess of (a) the aggregate present value as of the date of such prepayment of
the expected future cash flows of such Note (for the avoidance of doubt, such
amounts shall include all principal and interest payable with respect to such
Note) (exclusive of interest accrued to the date of prepayment) that, but for
such prepayment, would have been payable if such prepayment had not been made,
all determinated by discounting such amounts at a rate which is equal to the
Treasury Rate plus .50% over (b) the aggregate principal amount of the Note then
to be prepaid and (ii) in the case of the Senior Discount Notes (if such
prepayment occurs prior to July 1, 2003), the excess of (a) the present value of
the sum of all remaining interest (excluding accrued and unpaid interest, if
any), premium and principal payments that would become due on the Senior
Discount Notes if they were to remain outstanding and be redeemed on July 1,
2003, computed using a discount rate equal to the Treasury Rate plus .50% over
(b) the Accreted Value of the Senior Discount Note then to be prepaid. For
purposes of any determination of the Make Whole Premium:
"TREASURY RATE" shall mean at any time with respect to the Notes being
prepaid (a) the yield reported on page C4 of the Bloomberg Financial
Markets Service (or, if not available, any other nationally recognized
trading screen reporting on-line intraday trading in United States
government securities) at 11:00 A.M. (New York, New York time) for those
actively traded United States government securities having a maturity
(rounded to the nearest month) corresponding to the remaining Weighted
Average Life to Maturity of the Notes being prepaid or (b) in the event
that no nationally recognized trading screen reporting on-line intraday
trading in United States government securities is available, Treasury
Rate shall mean the weekly average of the yield to maturity on the United
States Treasury obligations with a constant maturity (as compiled by and
published in the most recently published issue of the United States
Federal Reserve Statistical Release designated H.15(519) or its successor
publication) most nearly equal to (by rounding to the nearest month) the
Weighted Average Life to Maturity of the Notes then being prepaid. If no
maturity exactly corresponding to such Weighted Average Life to maturity
of such Notes shall appear therein, the weekly average yield for the two
most closely corresponding published
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maturities shall be calculated pursuant to the foregoing sentence and the
Treasury Rate shall be interpolated or extrapolated, as the case may be,
from such yields on a straight-line basis (rounding, in the case of
relevant periods, to the nearest month).
"MASTER RESTRUCTURING AGREEMENT" means the Master Restructuring Agreement
dated July 9, 1997 among the Company and the independent power producer parties
thereto, as amended from time to time.
"MOODY'S" means Moody's Investor Service, Inc., or any successor to its
securities ratings business.
"MRA REGULATORY ASSET" means the item designated as such on the Company's
balance sheet, which represents amounts that the Company is permitted to collect
from customers, pursuant to the regulations of the PSC, in respect of the IPP
Buyout and the other transactions contemplated by the Master Restructuring
Agreement.
"NET PROCEEDS" means the aggregate cash proceeds received by a Person in
respect of any sale of assets, net of amounts paid to minority interests,
co-owners and lienholders, direct costs relating to such sale (including,
without limitation, legal, accounting and investment banking fees and sales
commission), taxes paid or payable which are attributable to such sale (after
taking into account any available tax credits or deductions and any tax sharing
arrangements relating to such assets), and any cash reserve for adjustment in
respect of the sale price of such asset or assets established in accordance with
GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provide credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"NUCLEAR GENERATING ASSETS" means the Company's interest in Units 1 and 2 of
the Nine Mile Point Nuclear Generating Plant, and any related asset necessary
for the operation of such plants and any associated license or permit.
"OPERATING CASH FLOW" means, with respect to any Person for any period, the
net cash provided by operating activities of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP.
"OSWEGO PLANT" means the interest of the Company in the fossil fuel electric
generation plant located near Lake Ontario in Oswego, New York.
"OTHER INDEBTEDNESS" shall mean Senior Indebtedness incurred after the
Initial Issuance Date, except (a) Permitted Refinancing Indebtedness with
respect to First Mortgage Bonds issued and outstanding at the closing on the
Initial Issuance Date; (b) Permitted Refinancing Indebtedness with respect to
the Credit Facility; and (c) Indebtedness under the Securitization Transaction
and the Receivables Financing and any Permitted Refinancing Indebtedness with
respect thereto.
"PERMITTED ASSET SWAP" means any swap of utility property or assets (or
assets related or ancillary thereto) of the Company for other property or assets
that will be used in or in connection with the Company's utility business.
"PERMITTED HEDGING AGREEMENT" of any Person shall mean any Hedging
Obligation entered into in the ordinary course of business or pursuant to the
MRA and not for speculation or trading purposes that is designed to protect such
Person against fluctuations in interest rates or currency exchange rates or
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commodity prices with respect to Indebtedness incurred or proposed to be
incurred or assets used in the business in the ordinary course and which in the
case of agreements relating to interest rates shall have a notional amount no
greater than the payments due with respect to the Indebtedness being hedged
thereby.
"PERMITTED INVESTMENT" means (a) an Investment in the Company or in a
Restricted Subsidiary of the Company (including Investments by the Company in
the First Mortgage Bonds or the Notes to the extent otherwise permitted by this
Indenture); (b) an Investment in Cash Equivalents; (c) an Investment by the
Company or any Restricted Subsidiary in a Person, if as a result of such
Investment (i) such Person becomes a direct or indirect Restricted Subsidiary of
the Company or (ii) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company; (d) an
Investment in any Person owning or operating electric generation, transmission
or distribution facilities or gas distribution or transportation or related
systems in which the Company owns joint or undivided interests; (e) an
Investment in a Person formed as a special purpose entity in conjunction with a
Receivables Financing or Securitization Transaction; (f) an Investment received
in connection with the bankruptcy or reorganization of customers and suppliers
and in settlement of delinquent obligations of, and other disputes with,
customers and suppliers arising in the ordinary course of business; and (g) any
payment pursuant to those existing Investments of the Company, including the
nuclear decommissioning trust fund and the employee benefit plan trusts,
described in a Schedule attached to the Indenture.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to renew, extend, refinance, replace (including the
replacement at any time following their stated maturity of First Mortgage Bonds
or Notes that are repaid at maturity, or the replacement at any time following
their stated maturity of the Credit Facility or the Receivables Financing),
defease or refund, in whole or in part, other Indebtedness of the Company or any
of its Restricted Subsidiaries; PROVIDED, HOWEVER, that (i) the principal amount
of such Permitted Refinancing Indebtedness does not exceed the principal amount
of the Indebtedness so renewed, extended, refinanced, replaced, defeased or
refunded (plus the amount of accrued interest and premiums (including premium
paid on open market purchases), if any, thereon and the reasonable expenses
incurred in connection therewith); (ii) Permitted Refinancing Indebtedness that
is incurred prior to the maturity of the Indebtedness that it is renewing,
extending, refinancing, replacing, defeasing or refunding must be on terms at
least as favorable to the holders of Notes as those contained in the
documentation governing the Indebtedness being renewed, extended, refinanced,
replaced, defeased, or refunded and: (a) if such Indebtedness has a final
maturity date earlier than the final maturity date of the series of Notes with
the latest final maturity date, then such Permitted Refinancing Indebtedness
must have a final maturity date the same as or later than the final maturity
date of, and a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being renewed, extended,
refinanced, replaced, defeased or refunded, and (b) if such Indebtedness has a
final maturity date later than the final maturity date of the series of Notes
with the latest final maturity date, then such Permitted Refinancing
Indebtedness must have a final maturity date the same as or later than the final
maturity date of, and a Weighted Average Life to Maturity equal to or greater
than the maturity of, the series of Notes with the latest final maturity date;
(iii) if the Indebtedness being renewed, extended, refinanced, replaced,
defeased or refunded is subordinated in right of payment to the Notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the holders of Notes as those contained in the
documentation governing the Indebtedness being refinanced, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary (or, in the case of the Receivables Financing, the special
purpose entity) that is the obligor on the Indebtedness being renewed, extended,
refinanced, replaced, defeased or refunded.
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"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"POLLUTION CONTROL OBLIGATIONS" means the Indebtedness or other obligations
(however designated) of the Company in respect of tax-exempt revenue bonds
issued by the New York State Energy Research and Development Authority.
"POWERCHOICE AGREEMENT" means the PowerChoice Settlement Agreement between
the Company and the PSC, as approved by the PSC in an Order dated March 20,
1998, as such agreement may be amended or modified from time to time.
"PREFERRED STOCK" means any Capital Stock of the Company which by its terms
has preference to Common Stock in right of dividends or other distributions or
upon liquidation or dissolution.
"PSC" means the New York State Public Service Commission, or any successor
agency or other governmental entity performing the same functions.
"RATING AGENCY" means any of S&P, Moody's, Duff & Phelps Credit Rating
Company and Fitch Investors Service, Inc., and their successors.
"RATING CATEGORIES" means (i) with respect to S&P, any of the following
categories (any of which may include a "+" or "-"): AAA, AA, A, BBB, BB, B, CCC,
CC, C and D (or equivalent successor categories); (ii) with respect to Moody's,
any of the following categories (any of which may include a "1", "2" or "3"):
Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C and D (or equivalent successor categories);
and (iii) the equivalent of any such categories of S&P or Moody's used by
another Rating Agency, if applicable.
"RATING DECLINE" means, at any time within 90 days (which period shall be
extended so long as the rating of the Notes is under publicly announced
consideration for a possible downgrade by any Rating Agency) after the date of
public notice of a Change of Control, or the intention of the Company or any
Person to effect a Change of Control, (i) the Rating of the Notes is decreased
at least one Gradation by any Rating Agency or (ii) a withdrawal of the rating
of the Notes by any Rating Agency.
"RECEIVABLES FINANCING" means the obligations of the Company pursuant to the
Trade Receivables Purchase and Sale Agreement, dated as of August 30, 1996,
among NM Receivables Corp., Corporate Receivables Corporation, Citibank, N.A.,
Citicorp North America, Inc. and the Company, as such agreement is amended or
modified from time to time.
"RELATED ASSET" means real or tangible personal property integral to the
generation, transmission or distribution of electricity or the transportation or
distribution of natural gas, and ancillary or related activities, including
other energy-related businesses.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of such Person that
is not an Unrestricted Subsidiary.
"S&P" means Standard & Poors' Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"SALE OF ASSETS" means (i) the sale, lease, conveyance or other disposition
of any assets (including, without limitation by way of a sale and leaseback) by
the Company or any Restricted Subsidiary other than sales of inventory or other
current assets in the ordinary course of business consistent with past practice;
(ii) the issue or sale by the Company or any of its Restricted Subsidiaries of
Equity Interests of any of their Restricted Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a Fair Value in excess of $25.0 million or (b) for
Net Proceeds in excess of $25.0 million; (iii) the sale or other disposition
(but not any spin-off or other distribution to the Company's
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shareholders) of the Generating Assets or the Oswego Plant; or (iv) a
Securitization Transaction. Notwithstanding the foregoing: (i) a transfer of
assets by the Company to a Wholly-Owned Restricted Subsidiary or by a
Wholly-Owned Restricted Subsidiary to the Company or to another Wholly-Owned
Restricted Subsidiary; (ii) an issuance of Equity Interests by a Wholly-Owned
Restricted Subsidiary to the Company or to another Wholly-Owned Restricted
Subsidiary; (iii) a Restricted Payment that is permitted by the Indenture; (iv)
sales of property or equipment that have become worn out, obsolete or damaged or
otherwise unsuitable for use in connection with the business of the Company or
any of its Restricted Subsidiaries; (v) transactions involving the license,
lease or sublease of any real or personal property in the ordinary course of
business; (vi) the making of any Permitted Investment; (vii) the transfer, sale
or assignment of assets to a single purpose entity in connection with the
Receivables Financing; and (viii) a Permitted Asset Swap, will not be deemed to
be a Sale of Assets.
"SECURITIZATION TRANSACTION" means a transaction in which the Company,
pursuant to authorization of the PSC, or other appropriate governmental
authorizations, transfers rights or other property to a Person formed as a
special purpose entity in conjunction with a financing based on the Company's
right to collect a non-bypassable wires or similar fee.
"SENIOR INDEBTEDNESS" means any senior Indebtedness of the Company,
including the First Mortgage Bonds, the Credit Facility, the Notes and the
Medium-Term Notes.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act of 1933, as amended, as such Regulation is in
effect on the date hereof.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company (whether
outstanding on the date hereof or hereafter created, incurred, assumed or
Guaranteed by the Company or its Restricted Subsidiaries) which is subordinate
to the Notes in right of payment or rights upon liquidation of the Company,
whether pursuant to the terms of the instrument creating or evidencing such
Indebtedness or otherwise.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof); and (ii) any partnership (a) the sole general partner or the managing
partner of which is such Person or a Subsidiary of such Person or a Subsidiary
of such Person or (b) the only general partners of which are such Person or one
or more Subsidiaries of such Person (or any combination thereof).
"SUPPLEMENTAL INDENTURE" means any indenture duly authorized and approved by
the Company's Board of Directors and entered into between the Company and the
Trustee in accordance with the Indenture.
"TIPES TRANSACTION" means a financing transaction or transactions in which
the Company establishes a trust or other pass-through entity whose common equity
interests are owned by the Company or a Subsidiary and whose assets consist of
debt securities of the Company or any Restricted Subsidiary for the purpose of
issuing preferred interests in such trust or other entity to investors.
"UNRESTRICTED SUBSIDIARY" means (i) Opinac North America, Inc., Opinac
Energy Corporation, Plum Street Enterprises, Inc., Canadian Niagara Power
Company, Limited and any other Subsidiary that is designated by the Board of
Directors as an Unrestricted Subsidiary pursuant to a Board resolution; but only
to the extent that any such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary unless the terms of
any such agreement, contract, arrangement or understanding are no less favorable
to the Company or such Restricted Subsidiary than those that might be obtained
at the time from Persons who are not Affiliates of the Company; (c) is a Person
with respect to which neither the Company
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nor any of its Restricted Subsidiaries has any direct or indirect obligation (x)
to subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (d) has not Guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries. Any such designation by the Board of Directors will
be evidenced to the Trustee by filing with the Trustee a certified copy of the
Board resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described under the caption "Certain
Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date by the covenant described under the caption "Certain
Covenants-Incurrence of Indebtedness", the Company shall be in default of such
covenant). The Board of Directors may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted by the
covenant described under the caption "Certain Covenants--Incurrence of
Indebtedness" and (ii) no Default or Event of Default would be in existence
following such designation.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, with respect to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment; by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or ownership
interests of which (other than directors' qualifying shares) shall at the time
be owned by such Person or by one or more Wholly-Owned Restricted Subsidiaries
of such Person.
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DESCRIPTION OF OTHER INDEBTEDNESS
Upon the completion of the Offering, the Company will have outstanding, in
addition to the Notes, indebtedness outstanding under the Credit Facility, its
First Mortgage Bonds, Promissory Notes and Medium Term Notes. The following is a
brief summary of the principal terms and conditions of the foregoing, all of
which will be "Senior Indebtedness" under the terms of the Indenture.
CREDIT FACILITY
The Company has a $804.4 million credit facility (the "Credit Facility")
which is secured with First Mortgage Bonds, with a bank group consisting of a
$255.0 million term loan agreement (the "Term Loan Agreement"), a $125.0 million
revolving credit agreement, and $424.4 million for letters of credit (the
"Letter of Credit"). As of March 31, 1998, the amount outstanding under the
Credit Facility was $529.4 million, consisting of $105.0 million under the Term
Loan Agreement and $424.4 million under the Letter of Credit, leaving the
Company with $275.0 million of borrowing capability under the Credit Facility.
The interest rate applicable to the Credit Facility is variable based on certain
rate options available under the Credit Facility and currently approximates
7.38% (but is capped at 15%). The Company is currently negotiating with lenders
to amend the Credit Facility to extend the expiration date from June 30, 1999 to
August 1, 2000.
FIRST MORTGAGE BONDS
At March 31, 1998, the Company had $2.8 billion aggregate principal amount
of First Mortgage Bonds in 18 different series issued pursuant to supplements to
the Company's Mortgage Trust Indenture dated as of October 1, 1937, as amended.
The First Mortgage Bonds bear interest at fixed rates ranging from 5 7/8% to
9 3/4% for different series, with a weighted average interest rate of 7.81% for
all series during 1997. The First Mortgage Bonds are secured by a lien on
substantially all gas and electric properties owned by the Company and used or
useful in the operation of the Company's properties as an integrated system,
together with all rights pertaining thereto. Substantially all after-acquired
property of such character will also become subject to such lien. The First
Mortgage Bonds mature between 1998 and 2029.
PROMISSORY NOTES
At March 31, 1998, the Company had outstanding approximately $413.8 million
Adjustable Rate Promissory Notes (the "Pollution Control Bonds") issued in seven
series with maturities ranging from July 1, 2015 to July 1, 2027. The Pollution
Control Bonds were issued to NYSERDA to secure a like amount of tax-exempt
revenue bonds issued by NYSERDA. Such securities bear interest at a daily
adjustable interest rate (with a Company option to convert to other rates,
including a fixed interest rate which would require the Company to issue First
Mortgage Bonds to secure the NYSERDA debt) which averaged 3.63% for 1997 and
were supported by bank direct pay letters of credit under the Credit Facility.
MEDIUM TERM NOTES
At March 31, 1998, the Company also had outstanding $20.0 million of
unsecured notes (the "Medium Term Notes") with maturities between 2000 and 2004
and bearing interest at rates ranging from 9.95% to 9.99% pursuant to an
indenture between the Company and IBJ Schroder Bank & Trust Company, as trustee.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary description of certain United States federal
income tax consequences of the acquisition, ownership and disposition of the
Notes, based on advice received from Bryan Cave LLP, special tax counsel to the
Company. The described consequences are based upon the provisions of the Code,
applicable Treasury regulations, rulings and other administrative
pronouncements, and judicial decisions as of the date hereof. Such authorities
may be repealed, revoked or modified, possibly with retroactive effect, so as to
result in federal income tax consequences different from those indicated. No
ruling from the Internal Revenue Service ("IRS") has been or will be sought with
respect to any of the described consequences and there can be no assurance that
the IRS would necessarily accept such consequences in the event of an audit.
This discussion applies only with respect to Notes that are held as "capital
assets" (within the meaning of section 1221 of the Code), and addresses only
initial purchasers of the Notes. This discussion does not purport to deal with
all aspects of federal income taxation that might be relevant to particular
holders in light of their particular circumstances or tax status, including
holders who are subject to special treatment under the federal income tax laws,
such as foreign holders, certain financial institutions, insurance companies,
dealers in securities or foreign currency, tax-exempt organizations or
retirement plans, persons who enter into hedging transactions in connection with
the Notes, or who hold the Notes as a hedge against currency risks or as part of
a straddle with other investments or as part of a "synthetic security" or other
integrated investment (including a conversion transaction), a constructive sale
transaction, or persons whose functional currency is not the U.S. dollar. Nor
does the discussion address the consequences or effect of any applicable state,
local or foreign tax laws, or any estate or gift tax laws.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH INVESTOR IS
URGED TO CONSULT ITS OWN TAX ADVISOR TO DETERMINE THE TAX IMPACT OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES IN LIGHT OF SUCH INVESTOR'S
PARTICULAR CIRCUMSTANCES, INCLUDING ANY CONSEQUENCES UNDER THE TAX LAWS OF ANY
STATE, LOCAL, FOREIGN OR OTHER NON-FEDERAL JURISDICTION.
HOLDERS--UNITED STATES PERSONS
For purposes of this discussion, the term "holder" refers to any person who
is considered the owner of a Note for U.S. federal income tax purposes, whether
or not such person is the registered holder of the Note. Except as set forth
under the subheadings "Non-U.S. Holders" and "Backup Withholding and Information
Reporting", the described tax consequences apply to holders of Notes who are
"United States persons," including: (i) an individual who is a citizen or
resident of the United States for federal income tax purposes, (ii) a
corporation or partnership created or organized in or under the laws of the
United States or any State or the District of Columbia, (iii) an estate (other
than a foreign estate) or (iv) any trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States persons have the authority to control all substantial
decisions of the trust.
TREATMENT OF NOTES AS INDEBTEDNESS OF THE COMPANY
The Company intends to characterize and treat the Notes as "indebtedness"
(as opposed to a "stock" or other "equity"-type interest in the Company) for all
federal income tax purposes. Pursuant to section 385(c) of the Code, such
characterization will generally be binding upon all holders of the Notes (but
not upon the IRS).
INTEREST INCOME--SERIES B THROUGH G NOTES
For federal income tax purposes, interest paid or accrued in respect of the
Series B through G Notes will be includible in a holder's gross income, as
ordinary interest income, in accordance with its regular
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method of tax accounting. Although the Series B through G Notes will be issued
at a price that is less than their stated principal amount, the discount will
not exceed 0.25% of the stated redemption price at maturity multiplied by the
number of whole years to maturity. Accordingly, the amount of any original issue
discount on these Notes that is attributable to the difference between their
purchase price and their stated redemption price would be considered DE MINIMIS
and thus treated as zero.
ORIGINAL ISSUE DISCOUNT--SERIES A AND SENIOR DISCOUNT NOTES
GENERAL. The Series A and Senior Discount Notes will be issued with
original issue discount ("OID") for federal income tax purposes. A U.S. holder
of a Series A or Senior Discount Note will be required to include such OID as
ordinary income (regardless of whether such holder is a cash or accrual basis
taxpayer) on a constant yield to maturity basis in advance of the receipt of
some or all of the related cash payments, as described below, in each taxable
year.
The amount of OID with respect to each Series A or Senior Discount Note will
be equal to the excess of (i) its "stated redemption price at maturity" over
(ii) its issue price. Pursuant to the Treasury Regulations issued under
provisions of the Code relating to OID (the "OID Regulations"), the "stated
redemption price at maturity" of each such Note will include all payments to be
made in respect thereof, including any stated interest payments, other than
payments of "qualified stated interest." Payments of qualified stated interest
are payments of interest which are unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually at a qualifying
rate, including a single fixed rate during the entire term of the debt
instrument. In respect of the Senior Discount Notes, since no actual cash
payments will be made until January 1, 2004, no interest payments on the Senior
Discount Notes will constitute "qualified stated interest."
TAXATION OF ORIGINAL ISSUE DISCOUNT. A U.S. holder of a Series A or Senior
Discount Note is required to include in gross income as interest income for
federal income tax purposes an amount equal to the sum of the "daily portions"
of the OID for each day during the taxable year that the Series A or Senior
Discount Note was held. The daily portion of OID required to be included in a
holder's gross income in a taxable year will be determined upon a constant yield
to maturity basis by allocating to each day during the taxable year on which the
holder holds the Series A or Senior Discount Note a pro-rata portion of the OID
which is attributable to the "accrual period" in which such day is included.
Accrual periods with respect to a Series A or Senior Discount Note may be of any
length and may vary in length over the term of the Series A or Senior Discount
Note as long as (i) no accrual period is longer than one year and (ii) each
scheduled payment of interest or principal on the Series A or Senior Discount
Note occurs on either the final or first day of an accrual period. The amount of
the OID attributable to each "accrual period" will be the product of (A) the
"adjusted issue price" of the Series A or Senior Discount Note at the beginning
of such accrual period (i.e., the issue price of the Series A or Senior Discount
Note, generally increased by all prior accruals of OID with respect to the
Series A or Senior Discount Note and reduced by all payments made with respect
to the Series A or Senior Discount Note) and (B) the "yield to maturity" of the
Series A or Senior Discount Note (stated in a manner appropriately taking into
account the length of the accrual period). The Series A or Senior Discount
Notes' yield to maturity is the discount rate, which when applied to all
payments required to be made with respect to the Series A or Senior Discount
Notes, results in a present value equal to the issue price. Accordingly, a
holder of a Series A or Senior Discount Note will be required to include OID in
gross income for federal income tax purposes in advance of the receipt of cash
in respect of such income. The amount of OID allocable to an initial short
accrual period may be computed using any reasonable method if all other accrual
periods, other than a final short accrual period, are of equal length. The
amount of OID allocable to the final accrual period at maturity of the Series A
or Senior Discount Notes is the difference between (x) the amount payable at the
maturity of the Series A or Senior Discount Note, and (y) the Series A or Senior
Discount Note's adjusted issue price as of the beginning of the final accrual
period.
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EFFECT OF MANDATORY AND OPTIONAL REDEMPTIONS ON OID. In the event of a
Change of Control Triggering Event, the Company will be required to offer to
redeem all of the Series A and the Senior Discount Notes at the redemption
prices specified elsewhere herein. See "Description of Notes--Change of
Control." Under the OID Regulations, computation of yield and maturity of the
Series A or Senior Discount Notes is not affected by such redemption rights and
obligations if, based on all the facts and circumstances as of the issue date,
the potential occurrence of such contingencies is remote. The Company has
determined that, based on all of the facts and circumstances that are expected
to exist as of the issue date, the possibility that a Change of Control
Triggering Event or an optional redemption by the Company will occur is remote
and, as a result, the stated payment schedule of the Series A or Senior Discount
Notes will not be adjusted for such contingencies.
The Company may redeem the Series A or Senior Discount Notes, in whole or in
part, at any time at redemption prices specified elsewhere herein. See
"Description of Notes--Optional Redemption." The OID Regulations contain rules
for determining the "maturity date" and the stated redemption price at maturity
of an instrument that may be redeemed prior to its stated maturity date at the
option of the issuer. Under the OID Regulations, solely for purposes of the
accrual of OID, it is assumed that the issuer will exercise any option to redeem
a debt instrument if such exercise will lower the yield-to-maturity of the debt
instrument. The Company anticipates that it will not be presumed to redeem the
Series A or Senior Discount Notes prior to their stated maturity under the
foregoing rules because the exercise of such option would not lower the
yield-to-maturity of the Series A or Senior Discount Notes.
REPORTING REQUIREMENTS. The Company will report annually to the IRS and to
each holder the amount of OID accrued with respect to such Series A or Senior
Discount Note for that year.
DEDUCTIBILITY OF ORIGINAL ISSUE DISCOUNT BY THE COMPANY
Certain issuers of "applicable high yield discount obligations" ("AHYDOs")
are not permitted to deduct interest attributable to OID on such obligations as
it accrues. An AHYDO is a debt instrument that (i) has a maturity date that is
more than five years from the date of issue, (ii) bears a yield to maturity that
equals or exceeds the sum of (A) the applicable federal rate (the "AFR") in
effect for the calendar month in which the obligation was issued (5.93% for
instruments issued in June, 1998), plus (B) five percent (5%), and (iii) has
"significant original issue discount." A debt instrument is deemed to be issued
with "significant original issue discount" if the aggregate amount which would
be includible in gross income of a holder with respect to such instrument for
periods before the close of any accrual period ending after the date five years
after the date of issue exceeds the sum of (i) the aggregate amount of interest
required to be paid under the instrument before the close of such accrual period
and (ii) the product of the issue price of such instrument and its yield to
maturity.
If the Senior Discount Notes are determined to be AHYDOs, to the extent any
AHYDO limitations apply, the deduction of the "disqualified portion" of the OID
is permanently disallowed and the remainder of the OID is not deductible until
it is actually paid in cash or property (other than equity or debt of the
issuer).
MARKET DISCOUNT; ACQUISITION PREMIUM
If a holder acquires a Note for an amount that is less than the sum of all
payments (other than payments with respect to qualified stated interest) due
with respect to such Note at the time of acquisition, the amount of such
difference will be treated as "market discount" for federal income tax purposes,
unless such difference is less than a specified DE MINIMIS amount. Under the
market discount rules, a holder will be required to treat any principal payment
on, or any gain on the sale, exchange, retirement or other disposition of, a
Note as ordinary income to the extent that such gain does not exceed the accrued
market discount on such Note. If a holder makes a gift of a Note, accrued market
discount, if any, will be recognized as if such holder had sold such Note for a
price equal to its fair market value. In addition, the
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holder may be required to defer, until the maturity of the Note or the earlier
disposition of the Note in a taxable transaction, the deduction of a portion of
the interest expense on any indebtedness incurred or continued to purchase or
carry such Note.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the Note,
unless the holder elects to accrue such market discount on a "constant yield to
maturity" basis. Such an election is irrevocable and is applicable only to the
Note with respect to which it is made. A holder of a Note may elect to include
market discount in income currently as it accrues (on either a straight-line or
constant yield to maturity basis), in which case the rules described above
regarding the deferral of interest deductions will not apply. An election to
include market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies, and may not be revoked without IRS consent.
A holder who purchases a Note for an amount in excess of the sum of all
payments due with respect to such Note (other than payments with respect to
qualified stated interest) will be considered to have purchased the Note at a
"premium." Under section 171 of the Code, a holder generally may elect to
amortize the premium over the remaining term of the Note on a constant yield to
maturity basis. The amount amortized in any year will be treated as a reduction
of the holder's interest from the Note. A holder who elects to amortize such
premium must also reduce its tax basis in a Note by the amount of premium
amortized during its holding period. Bond premium on a Note held by a holder who
does not make such an election will decrease the gain or increase the loss
otherwise recognized on disposition of the Note. Under recently finalized
Treasury regulations, any premium on a Note that is not amortized pursuant to an
election under section 171 of the Code may be deductible only as a capital loss
upon the maturity of the Note. In the case of a Note that is callable by the
Company prior to maturity, the holder is required to amortize premium with
reference to the amount payable on the earlier call date if that would result in
a smaller amount of amortizable premium for the period prior to the call date.
The election to amortize premium on a constant yield to maturity basis, once
made, applies to all debt obligations held or subsequently acquired by the
electing holder on or after the first day of the first taxable year to which the
election applies (other than debt instruments the interest on which is
excludable from gross income), and may not be revoked without the consent of the
IRS.
With respect to the Series A or Senior Discount Notes, under the acquisition
premium rules of the Code and the OID Regulations, the daily portion of OID
which such holder must include in its gross income with respect to such Series A
or Senior Discount Notes for any taxable year will be reduced by an amount equal
to the OID multiplied by a fraction, the numerator of which is the amount of
such acquisition premium and the denominator of which is the OID remaining from
the date the Series A or Senior Discount Note was purchased to its maturity
date.
DISPOSITION OF NOTES
Unless a nonrecognition provision of the Code applies, the sale, exchange,
retirement at maturity, redemption prior to maturity (including pursuant to an
offer, or exercise of a call option, by the Company), or other disposition of a
Note will be a taxable event for federal income tax purposes. A holder will
recognize gain or loss equal to the difference between (i) the amount of cash
plus the fair market value of any property received upon such disposition, and
(ii) the holder's adjusted tax basis in the Note. A holder's adjusted tax basis
in a Note generally will be the holder's purchase price for the Note, increased
by amounts includible in income by the holder as market discount, or OID with
respect to the Series A or Senior Discount Notes, and reduced by any amortized
premium. Except with respect to that portion of any gain equal to the amount of
accrued market discount (which will constitute ordinary income), and that
portion of the amount realized on disposition that represents accrued and unpaid
interest (which also will constitute ordinary income), such gain or loss
generally will constitute capital gain or loss and will be long-term capital
gain or loss if the Note was held by the holder for more than 12 months at the
time of such
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sale, exchange, redemption or other disposition. For non-corporate holders, the
excess of net long-term capital gains over net short-term capital losses is
taxed under current law at a maximum rate of 20 percent (20%) for capital assets
held more than 18 months, and 28 percent (28%) for capital assets held for more
than 12 months but not more than 18 months at the time of the disposition. Gain
on the disposition of capital assets held for one year or less is subject to
federal income tax at ordinary income tax rates. Certain limitations exist on
the deductibility of capital losses by both corporations and individual
taxpayers.
NON-U.S. HOLDERS
The following discussion applies to any holder of a Note who is not a United
States person, as defined above. Such holders are hereafter referred to as
"Non-U.S. Holders."
Subject to the discussion of "backup" withholding below, payments of
interest by the Company or its agent (in its capacity as such) to a Non-U.S.
Holder will not be subject to U.S. federal withholding tax, provided that (i)
such holder does not actually or constructively own ten percent (10%) or more of
the total combined voting power of all classes of stock of the Company entitled
to vote; (ii) such holder is not a "controlled foreign corporation" for U.S.
federal income tax purposes (as defined in section 957 of the Code) that is
related, directly or indirectly, to the Company through stock ownership; (iii)
such interest payments are not "effectively connected" with the conduct by the
"Non-U.S. Holder" of a trade or business within the United States; and (iv) the
certification requirements of section 871(h) or 881(c) of the Code, as
applicable, are satisfied. Under the certification rules, the beneficial owner
of a Note must certify to the Company or its agent, under penalties of perjury,
that it is a Non-U.S. Holder and provide a completed IRS Form W-8 ("Certificate
of Foreign Status") (or substitute Form W-8). Recently finalized Treasury
regulations modify the certification procedures in certain respects for payments
made after December 31, 1999. A Non-U.S. Holder who does not meet all of the
above described requirements will generally be subject to U.S. federal
withholding tax at a flat rate of thirty percent (30%) (or a lower applicable
treaty rate) on payments of interest on the Notes, unless (i) such holder
otherwise qualifies for a withholding tax exemption or reduced withholding rate
under an applicable treaty, or (ii) the payments of interest by the Company or
its agent (in its capacity as such) to such holder are "effectively connected"
with the conduct by the Non-U.S. Holder of a trade or business in the United
States.
If payments of interest with respect to the Series B through G Notes, or the
accrual of OID with respect to the Series A or Senior Discount Notes, are
effectively connected with the conduct by a Non-U.S. Holder of a trade or
business within the United States, such holder, even though exempt from U.S.
federal withholding tax, will be subject to U.S. federal income tax on such
interest, or OID as the case may be, and on any gain realized on the sale,
exchange, retirement or other disposition of a Note in the same manner as if it
were a United States person. In addition, pursuant to section 884(c) of the
Code, if such Non-U.S. Holder is a foreign corporation, it may be subject to a
"branch profits tax" equal to thirty percent (30%) of its effectively connected
earnings and profits for that taxable year, unless it qualifies for a lower rate
under an applicable income tax treaty.
Subject to the discussion of "backup" withholding below, any gain realized
upon the sale, exchange, retirement or other disposition of a Note by a Non-U.S.
Holder will not be subject to U.S. federal income or withholding taxes unless
(i) such gain is effectively connected with the conduct by such Non-U.S. Holder
of a trade or business within the United States (or, under an applicable tax
treaty, is attributable to a U.S. permanent establishment maintained by such
Non-U.S. Holder); (ii) in the case of an individual, such holder is present in
the United States for 183 days or more in the taxable year of the retirement or
other disposition and certain other conditions are met; or (iii) such Non-U.S.
Holder is subject to tax pursuant to the provisions of the U.S. tax law
applicable to certain U.S. expatriates or nonresident aliens.
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BACKUP WITHHOLDING AND INFORMATION REPORTING
The "backup" withholding and information reporting requirements may apply to
certain payments of principal and interest on a Note and to certain payments of
proceeds from the sale, exchange, retirement or other disposition of a Note. The
Company, its agent, a broker or any paying agent, as the case may be, will be
required to withhold tax from any payment that is subject to backup withholding
at a rate of thirty-one percent (31%) of such payment if the holder fails to
furnish its correct taxpayer identification number (I.E., social security number
or employer identification number) and certifies that such holder is not subject
to backup withholding, or otherwise fails to comply with applicable requirements
of the backup withholding rules. Certain holders (including, among others, all
corporations) are not subject to the backup withholding and reporting
requirements.
Under current Treasury regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof to
a holder of a Note who has provided the required certification under penalties
of perjury that it is a Non-U.S. Holder, or has otherwise established an
exemption under applicable rules.
In general, payments of the proceeds from the sale or other disposition of a
Note by a Non-U.S. Holder which are made to or through a foreign office of a
broker will not be subject to a U.S. information reporting or backup
withholding, provided that the broker is not a United States person, a
controlled foreign corporation for U.S. tax purposes, or a foreign person fifty
percent (50%) or more of whose gross income is effectively connected with a U.S.
trade or business over a specified period. In addition, for payments made to or
through a foreign office of a broker after December 31, 1999, recently finalized
Treasury regulations make subject to U.S. information reporting and possibly
backup withholding, brokers that are a U.S. branch of (i) a foreign bank or
insurance company or (ii) a foreign partnership controlled by U.S. persons or
engaged in a U.S. trade or business. Payments to or through the U.S. office of a
broker are subject to U.S. information reporting and backup withholding, unless
the holder or beneficial owner certifies as to its Non-U.S. Holder status or
otherwise establishes an exemption under applicable rules.
Any amounts withheld under the backup withholding rules may be claimed as a
refund or credit against such holder's U.S. federal income tax liability,
provided the required information is furnished timely to the IRS. Holders should
consult their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Company and Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill"), Wasserstein Perella Securities, Inc. ("Wasserstein"),
Salomon Brothers Inc ("Salomon"), J.P. Morgan Securities Inc. ("JP Morgan"),
Citicorp Securities, Inc. ("Citicorp") and TD Securities (USA) Inc. ("TD", and
together with DLJ, Merrill, Wasserstein, Salomon, JP Morgan and Citicorp, the
"Underwriters"), the Underwriters have agreed to purchase the Notes from the
Company in the amounts set forth opposite each such Underwriter's name in the
table below at the applicable public offering price set forth on the cover page
of this Prospectus, less underwriting discounts and commissions.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OR
PRINCIPAL AMOUNT
AT
MATURITY OF
UNDERWRITER NOTES
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......................... $ 1,725,000,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................... 517,500,000
Wasserstein Perella Securities, Inc......................................... 517,500,000
Salomon Brothers Inc........................................................ 241,500,000
J.P. Morgan Securities Inc.................................................. 241,500,000
Citicorp Securities, Inc.................................................... 103,500,000
TD Securities (USA) Inc..................................................... 103,500,000
----------------
Total................................................................. $ 3,450,000,000
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
thereunder are subject to the approval of certain legal matters by their counsel
and to certain other conditions precedent. The Underwriting Agreement also
provides that the Company will indemnify the Underwriters and certain persons
controlling the Underwriters against certain liabilities and expenses, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act"),
or will contribute to payments the Underwriters are required to make in respect
thereof. The nature of the Underwriters' obligations under the Underwriting
Agreement is such that the Underwriters are committed to purchase all of the
Notes if any of the Notes are purchased.
The Underwriters and DLJ have advised the Company that they initially
propose to offer the Notes in part directly to the public at the applicable
offering price set forth on the cover page of this Prospectus, and in part to
certain dealers at such price less a concession not in excess of 0.40% of the
principal amount (or principal amount at maturity, as the case may be) of the
Notes. The Underwriters may allow, and such dealers may reallow, a concession to
certain other dealers not in excess of 0.25% of the principal amount (or
principal amount at maturity, as the case may be) of the Notes. After the
initial public offering, the public offering price, concession and reallowance
may be changed by the Underwriters or by DLJ, as the case may be, at any time
without notice.
There is currently no public market for the Notes and the Company has no
present plan to list any of the Notes on a national securities exchange. The
Underwriters have advised the Company that the Underwriters currently intend to
make a market in the Notes, but are not obligated to do so and may discontinue
any such market making at any time without notice. Accordingly, there can be no
assurance as to the liquidity of the trading market for the Notes.
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the Notes in any
jurisdiction where action for that purpose is required. The Notes offered hereby
may not be offered or sold, directly or indirectly, nor may this Prospectus or
any
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other offering material or advertisements in connection with the offer and sale
of the Notes be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this Prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the Offering and the distribution of this Prospectus. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the Notes offered hereby in any jurisdiction in which such an offer
or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes.
Specifically, the Underwriters may over allot the Offering, creating a syndicate
short position. The Underwriters may bid for and purchase Notes in the open
market to cover syndicate short positions or to stabilize the price of the
Notes. These activities may stabilize or maintain the market price of the Notes
above independent market levels. The Underwriters are not required to engage in
these activities and may end any of these activities at any time.
It is expected that delivery of the Notes will be made against payment
therefor on or about the date specified in the last paragraph of the cover page
of this Prospectus, which will be the ninth business day following the date
hereof. Under Rule 15c6-1 adopted by the Commission under the Exchange Act,
trades in the secondary market generally are required to settle in three
business days, unless the parties to any such trade expressly agree otherwise.
Accordingly, purchasers who wish to trade the Notes on the date hereof or any
day prior to the third business day before the date of delivery of the Notes
will be required by virtue of the fact that the Notes initially will settle in
T+9, to agree to a delayed settlement cycle at the time of any such trade to
prevent a failed settlement. Purchasers of the Notes who wish to trade the Notes
on the date hereof or the next six succeeding business days should consult their
own advisors.
DLJ and Merrill have performed various investment banking services for the
Company in the past, for which they have received customary remuneration, and
may provide such services in the future. DLJ has acted as financial advisor to
the Company with respect to the MRA and has delivered an opinion to the
Company's Board of Directors with respect to certain financial matters relating
to the MRA. A significant portion of DLJ's advisory fee is contingent upon the
successful restructuring of the Company's obligations under the PPAs pursuant to
the MRA. Wasserstein has performed various financial advisory services for the
IPP Parties in the past and in connection with the transactions contemplated by
the MRA, for which they have received and will receive in the future customary
remuneration, and may provide such services in the future. Citicorp Securities,
Inc. and its affiliates provide or may provide commercial banking and/or
investment banking services to the Company and its affiliates in the ordinary
course of business.
VALIDITY OF THE NOTES
The validity of the Notes offered hereby will be passed upon for the Company
by Sullivan & Cromwell, New York, New York, counsel to the Company. Certain
legal matters will be passed upon for the Underwriters by Sidley & Austin, New
York, New York.
EXPERTS
The financial statements incorporated in this Prospectus by reference to the
Annual Report on Form 10-K for the year ended December 31, 1997, 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
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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.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed 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 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.
67
<PAGE>
APPENDIX A
GLOSSARY OF CERTAIN ELECTRICITY, NATURAL GAS
AND ACCOUNTING TERMS
<TABLE>
<CAPTION>
TERM DEFINITION
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<S> <C>
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 a distribution system. Electric energy is
Distribution 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 watthours.
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.
</TABLE>
A-1
<PAGE>
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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 NOTES OFFERED
HEREBY, AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES 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 HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 11
Use of Proceeds................................. 15
Capitalization.................................. 16
Pro Forma Condensed Financial Statements........ 17
Selected Historical Financial Data.............. 28
Management's Discussion of Pro Forma Condensed
Financial Statements.......................... 30
The MRA and the PowerChoice Agreement........... 33
Description of Notes............................ 36
Description of Other Indebtedness............... 58
Certain United States Federal Income Tax
Considerations................................ 59
Underwriting.................................... 65
Validity of the Notes........................... 66
Experts......................................... 66
Available Information........................... 66
Incorporation of Certain Information by
Reference..................................... 67
Glossary of Certain Electricity, Natural Gas and
Accounting Terms.............................. A-1
</TABLE>
[LOGO]
<TABLE>
<C> <S>
$300,000,000 6 1/2% SERIES A SENIOR NOTES DUE 1999
$450,000,000 7% SERIES B SENIOR NOTES DUE 2000
$400,000,000 7 1/8% SERIES C SENIOR NOTES DUE 2001
$400,000,000 7 1/4% SERIES D SENIOR NOTES DUE 2002
$400,000,000 7 3/8% SERIES E SENIOR NOTES DUE 2003
$400,000,000 7 5/8% SERIES F SENIOR NOTES DUE 2005
$600,000,000 7 3/4% SERIES G SENIOR NOTES DUE 2008
$500,000,000 8 1/2% SENIOR DISCOUNT NOTES DUE 2010
</TABLE>
------------------------------
PROSPECTUS
------------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
WASSERSTEIN PERELLA SECURITIES, INC.
J.P. MORGAN & CO.
SALOMON SMITH BARNEY
CITICORP SECURITIES, INC.
TD SECURITIES
JUNE 17, 1998
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