<PAGE>
FILED PURSUANT TO RULE 424(B)(5)
REGISTRATION NUMBER 33-51073
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JUNE 1, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 1, 1998)
[LOGO]
15,674,149 SHARES
NIAGARA MOHAWK POWER CORPORATION
COMMON STOCK
All of the 15,674,149 shares (the "Shares") of common stock, par value $1.00
per share ("Common Stock"), of Niagara Mohawk Power Corporation, a New York
Corporation (the "Company"), offered hereby (the "Offering") are being sold by
the Company. All of the net proceeds to the Company from the Offering will be
used by the Company to pay certain independent power producers as partial
consideration pursuant to the Master Restructuring Agreement dated July 9, 1997,
as amended.
Consummation of the Offering will occur concurrently with and is conditioned
upon consummation of (i) the Master Restructuring Agreement; and (ii) the
offering by the Company of $3.45 billion principal amount of senior unsecured
debt (the "Debt Offering" and together with the Offering, the "MRA Financing")
consisting of $2.95 billion of senior notes (the "Senior Notes") and $500.0
million of senior discount notes (the "Senior Discount Notes" and together with
the Senior Notes, the "Notes") for estimated net proceeds to the Company of
approximately $3.272 billion.
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "NMK." On May 29, 1998, the last reported sale price for the Common
Stock on the NYSE was $12 3/8 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE S-9 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS PRIOR TO ANY INVESTMENT IN
THE SHARES.
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>
- -------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS (1) COMPANY(2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $ $ $
Total.................................... $ $ $
- -------------------------------------------------------------------------------------------
</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 estimated expenses of $1,000,000 payable by the Company.
The Shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including the right to reject orders in whole or in part. It is
expected that delivery of the Shares will be made in New York, New York, on or
about , 1998.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
WASSERSTEIN PERELLA SECURITIES, INC.
CIBC OPPENHEIMER
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE , 1998
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE
BY THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 415 UNDER THE
SECURITIES ACT OF 1933. A FINAL PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION.
<PAGE>
<PAGE>
[LOGO]
THE UNDERWRITERS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE>
PROSPECTUS SUPPLEMENT 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 SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. EACH PROSPECTIVE
INVESTOR IS ENCOURAGED TO READ THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN AND THEREIN IN
THEIR ENTIRETY. SEE "GLOSSARY OF CERTAIN ELECTRICITY, NATURAL GAS AND ACCOUNTING
TERMS" APPEARING AS APPENDIX A FOR DEFINITIONS OF CERTAIN TERMS USED IN THIS
PROSPECTUS SUPPLEMENT.
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 $3.6 billion in cash and approximately 42.9 million shares of the
Company's Common Stock. The closing of this Offering is contingent upon and
expected to occur concurrently with the consummation of the MRA and the Debt
Offering. The closing of the MRA is presently scheduled for June 30, 1998.
Pursuant to an amendment to the MRA that the Company expects to enter into, a
portion of the 42.9 million shares of Common Stock is being offered hereby and
the net proceeds thereof will be paid to the IPP Parties. The net proceeds of
the Debt Offering, together with cash on hand, will be used to fund the cash
portion of the Company's obligation under the MRA. The Offering and the Debt
Offering are collectively referred to herein as the "MRA Financing." See "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 MRA Financing,
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, $505.5 million, and
$(27.9) million, respectively. See "The MRA and the PowerChoice Agreement" and
the "Pro Forma Condensed Financial Statements" set forth herein.
S-3
<PAGE>
The Company's principal executive offices are located at 300 Erie Boulevard
West, Syracuse, New York 13202, and its telephone number is (315) 474-1511.
BACKGROUND OF 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 MRA Financing. 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
S-4
<PAGE>
Company's outstanding shares following such issuance). A portion of such 42.9
million shares is being offered hereby and the net proceeds thereof will be paid
to the IPP Parties. The remainder of such shares will be issued directly to the
IPP Parties. 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."
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 a one-
S-5
<PAGE>
year window in which to form a holding company that, if formed, would enhance
the Company's ability to explore unregulated business opportunities to foster
longer-term strategic growth. The Company is seeking approval from its
shareholders to establish a holding company structure through a share exchange
(the "Share Exchange"), in which present shareholders of the Company would
exchange their shares of the Company's Common Stock on a share-for-share basis
for shares of such holding company (such holding Company referred to herein as
"Holdings"). The implementation of a holding company structure, if approved by
the Company's shareholders, would only occur following various regulatory
approvals.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company...................... 15,674,149
Common Stock Outstanding after the Offering(1)........... 187,319,351
Use of Proceeds.......................................... To make payments to the IPP
Parties
pursuant to the MRA.
NYSE Symbol.............................................. NMK
</TABLE>
- ------------------------
(1) Reflects the issuance of approximately 42.9 million shares, including the
Shares offered herein, issued by the Company pursuant to the MRA as
compensation to the IPP Parties.
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 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 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 Supplement have been presented to
reflect such restatement.
S-6
<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 Supplement. 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands except per share data)
STATEMENT OF INCOME DATA:
Operating revenues....... $3,917,338 $3,990,653 $3,966,404 $3,870,904 $1,163,832 $1,098,404 $1,074,529 $3,805,476
Operating income......... 684,034 522,338 558,839 606,839 231,937 134,297 144,797 503,199
Interest charges......... 279,674 278,033 273,906 511,806 67,538 65,590 123,965 505,458
Income before federal and
foreign income taxes... 407,429 280,248 309,930 113,630 171,499 72,932 23,457 13,463
Net income (loss)........ 248,036 110,390 183,335 55,735 103,022 20,363 (11,787) (27,924)
Balance available for
common stock........... 208,440 72,109 145,938 18,338 93,623 11,140 (21,010) (65,145)
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 $ 0.10 $ 0.65 $ 0.08 $ (0.11) $ (0.35)
OTHER OPERATING DATA:
EBITDA (2)............... $ 929,130 $ 957,549 $ 961,502 $1,426,702 358,863 $ 222,273 $ 337,073 $1,318,887
Capital expenditures
(3).................... 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
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 13,412,941 9,515,010 9,707,583 13,536,383 13,536,383
CAPITALIZATION (AT END OF
PERIOD):
Long-term debt, excluding
current portion........ $3,582,414 $3,477,879 $3,417,381 $6,689,381 $3,478,628 $3,418,299 $6,690,299 $6,690,299
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 3,138,027 2,676,890 2,739,957 3,150,457 3,150,457
--------- --------- --------- ---------- --------- --------- ---------- ----------
Total capitalization... $6,633,216 $6,590,181 $6,661,518 $10,344,018 $6,682,248 $6,674,866 $10,357,366 $10,357,366
--------- --------- --------- ---------- --------- --------- ---------- ----------
--------- --------- --------- ---------- --------- --------- ---------- ----------
</TABLE>
S-7
<PAGE>
- ------------------------------
(1) Gives pro forma effect to the consummation of the MRA and the MRA Financing,
and the principal terms of the PowerChoice Agreement excluding the Genco
Divestiture, 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 Supplement.
(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.
S-8
<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 SUPPLEMENT UNDER THE CAPTIONS "PROSPECTUS SUPPLEMENT 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.
EFFECT OF MRA AND POWERCHOICE ON THE COMPANY'S REPORTED EARNINGS
The Company's reported net income will be significantly depressed in the
future as compared to historical results because of the effects of the MRA and
the PowerChoice Agreement. Pursuant to the rate reductions under PowerChoice,
the Company's electric revenues will be reduced by approximately $111.8 million
to be phased in over three years. In addition, the compensation paid to the IPP
Parties in the form of cash and Common Stock will be capitalized and carried on
the Company's books as the MRA Regulatory Asset in an amount of approximately
$4.0 billion. This asset will be amortized generally over ten years and will
substantially reduce the Company's reported earnings. Finally, the estimated
additional interest charges and amortization of debt issuance costs associated
with the Debt Offering will increase the Company's future interest expense and
correspondingly reduce earnings. The impact of reduced revenues under the
PowerChoice Agreement, the MRA Regulatory Asset amortization and the increased
interest expense related to the Debt Offering will be partially offset by the
benefit to the Company of the decreased cost of electricity purchased from the
IPPs. On a pro forma basis, as a result of the above adjustments, the Company's
net income (loss) will be reduced by $127.6 million and $128.6 million for the
year ended December 31, 1997 and the twelve months ended March 31, 1998,
respectively, to $55.7 million and $(27.9) million, respectively, for such
periods. On a historical basis, the Company reported net income of $183.3
million and $100.7 million, respectively, for such periods. The foregoing may
adversely affect the market for the Common Stock and the prices at which it may
trade.
SUBSTANTIAL LEVERAGE AND LIMITED FINANCIAL FLEXIBILITY
Following consummation of the MRA and the Debt 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 Debt 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 Company's
senior bank facility, which are secured with First Mortgage Bonds, $20.0 million
of unsecured medium term notes and $3.272 billion of Notes. The Company also
will have available additional borrowings of $275.0 million under its senior
bank facility and, under the financial covenants set forth in the indenture
governing the Notes, will have the ability to incur additional indebtedness, up
to certain limitations. See "Capitalization," "Summary Historical and Pro Forma
Financial Data" and "The MRA and the PowerChoice Agreement."
The degree to which the Company is leveraged could have important
consequences to holders of the Shares, 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
S-9
<PAGE>
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. See "Management's Discussion of Pro Forma Condensed Financial
Statements--Liquidity and Capital Resources."
EFFECT OF DECREASED SALES TO CUSTOMERS
Under the PowerChoice Agreement, the Company has established rates intended
to create sufficient cash flow to at least cover its operating expenses, satisfy
its fixed obligations, and recover allowable stranded costs. The Company's rate
design is based on estimates of future electricity usage and the number of
customers connected to the Company's distribution system. The level of electric
revenues can be adversely affected by lower than projected sales to retail
customers and by customer bypass of the system. Economic conditions in the
Company's service area could result in lower sales due to the relocation of
customers. Because of the relatively high cost of the Company's electricity,
customers could seek to bypass the Company's distribution system through
self-generation or the replacement of the Company with a municipal or other
utility. While the PowerChoice Agreement requires the payment of an exit fee or
access charge in these circumstances (except with respect to customers who had
made substantial investment in on-site generation as of October 10, 1997), the
affected customers and competitors may challenge the Company's right to collect
these fees, or the appropriate level of these fees. There can be no assurance
that the Company would prevail in any such proceeding. If revenues are
significantly lower than those anticipated in its rate design, the Company's
profitability could be materially adversely affected.
REGULATORY MATTERS
Following implementation of the PowerChoice Agreement, the Company will
remain subject to extensive regulation by the PSC. While the most material
aspects of the Company's rate structure for the next five years are established
in the PowerChoice Agreement, under certain circumstances, the PSC could
initiate proceedings to reduce rates. Conversely, the PSC is likely to continue
to assess competitive consequences in considering future rate increases even in
the event that the Company experiences revenue shortfalls or increased expenses.
In addition, many aspects of the Company's operations, including its electric
transmission and distribution systems, the operation and maintenance of its
nuclear facilities, its gas distribution operations and the issuance of
securities, will continue to be subject to extensive regulation by both the
federal government and the PSC. Changes in these regulations or in their
application to the Company could adversely affect the Company's business and
financial condition. Further, uncertainty exists regarding the ultimate impact
on the Company as the electric industry is further deregulated and electricity
suppliers gain open access to the Company's retail customers.
PSC procedures 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 120 days of the date on which approval is received.
Such an appeal may be based on the failure of the record to show a reasonable
basis for the terms of the PowerChoice Agreement and may result in an amendment
of the record to correct such failure, in renegotiation of such terms or in
renegotiation of the PowerChoice Agreement as a whole. There can be no assurance
that, if appealed, the approval of the PowerChoice Agreement will be upheld or
that such appeal will not result in terms substantially less favorable to the
Company than those described herein. In addition, certain parties have
petitioned the PSC for a rehearing of its order approving the PowerChoice
Agreement and filed an action seeking to enjoin the implementation of the
PowerChoice Agreement, the MRA and the Company's contemplated Genco Divestiture
on the grounds that the PSC failed to comply with the provisions of the New York
State Environmental Quality Review Act. On April 20, 1998, the application for a
temporary restraining order was denied, and on May 22, 1998, the injunction was
denied and the petition was dismissed, which decision is appealable. Suspension
of the PowerChoice Agreement or renegotiation of its material terms could have a
material adverse effect on the Company's results of operations.
S-10
<PAGE>
RESTRICTIONS ON THE ABILITY TO PAY DIVIDENDS
The Company's Board of Directors omitted the Common Stock dividend beginning
in 1996 in order to stabilize the Company's financial condition and to provide
additional cash to service its fixed obligations. The Company expects to
dedicate a substantial portion of its future cash flow to reduce the
indebtedness incurred in connection with the MRA, which will reduce the amount
of cash available to pay dividends on the Common Stock. In addition, the
PowerChoice Agreement, as well as the indenture governing the Notes and the
Company's senior bank facility, significantly limit the amount that the Company
is permitted to pay in dividends on its Common Stock and Preferred Stock. In
light of the foregoing, there can be no assurance that the Company will be in a
position to pay dividends on the Common Stock in the near future and, if such
dividends are paid, their amount may be limited based on the Board's evaluation
of the Company's financial condition, business conditions and other factors at
the time.
FEDERAL INCOME TAX IMPLICATIONS OF MRA TO THE COMPANY
The Company has requested rulings from the Internal Revenue Service to the
effect that the amount paid to the IPP Parties who are terminating their PPAs
upon closing of the MRA will be currently deductible and generate a substantial
net operating loss ("NOL"). No assurance can be given that favorable rulings
will be issued. If favorable rulings are not received, and the Company's claimed
current deductions are challenged on audit and not ultimately sustained, the
amount of tax refunds generated from the NOL carryback, and thus the amount of
cash available to provide operating capital and service the Company's
obligations following consummation of the MRA, would be reduced. While any
disallowed deductions would ultimately be allowable in future years, and would
likely create, or increase the amount of NOLs available to offset tax
liabilities in future years, cash flow would be adversely affected in the near
term.
The Company's ability to utilize the NOL generated as a result of the MRA
could be substantially limited under the rules of section 382 of the Internal
Revenue Code (the "Code") if certain changes in the Company's stock ownership
were to occur following the consummation of the MRA. In general, the limitation
is triggered by a more than 50% change in stock ownership during a 3-year
testing period by shareholders who own, directly or indirectly, 5% or more of
the Common Stock. For purposes of making the change in ownership computation,
the IPP Parties who are issued Common Stock pursuant to the MRA and the
purchasers in the 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.
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
S-11
<PAGE>
purchase power in the open market to replace the power normally produced by
these facilities. Such purchases would subject the Company to the risk of
increased energy prices and, depending on the length of the outage and the level
of market prices, could have a material adverse effect on the Company's cash
flow. Under the PowerChoice Agreement, the Company is not entitled to pass along
these increased costs to customers in the form of higher electric rates. If
either facility were to have problems with its physical condition or require
significant capital expenditure, the Company would evaluate the economic
justification of continuing to operate the facility. The prudence of the
Company's decision to close a facility is subject to review by the PSC to
determine whether the Company should be allowed to recover its incremental
costs, including replacement power costs, which would likely be an amount
significant to the Company.
ENVIRONMENTAL REGULATIONS
The Company and its operations are subject to a wide range of environmental
laws and regulations relating to, among other matters, air emissions, wastewater
discharges, landfill operations and hazardous waste management. Compliance with
these laws and regulations is an increasingly important factor in the Company's
business. The Company is currently conducting a program to investigate and
restore, as necessary to meet current environmental standards, certain
properties associated with its former gas manufacturing process and other
properties which the Company has learned may be contaminated with industrial
waste, as well as investigating identified industrial waste sites as to which it
may be determined that the Company contributed. The Company has also been
advised that various federal, state or local agencies believe certain properties
require investigation and has prioritized the sites based on available
information in order to enhance the management of investigation and remediation,
if necessary. The Company is currently aware of 124 such sites with which it has
been or may be associated, including 76 which are Company-owned. With respect to
non-owned sites, the Company may be required to contribute some share of the
remedial costs. The Company has denied any responsibility in certain of these
sites and is contesting liability accordingly. Although in practice, remedial
costs are often allocated among parties, one party can, as a matter of law, be
held liable for all of the remedial costs at a site regardless of fault. The
Company has accrued a liability in the amount of $220 million for remedial costs
and the high end of the range of remedial costs is currently estimated by the
Company to be approximately $650 million, including approximately $285 million
in the unlikely event the Company is required to assume 100% responsibility at
non-owned sites. The Company believes that it is probable that environmental
compliance and remediation costs will continue to be recovered in its rates and
the Company has recorded a regulatory asset for recovery of these costs.
However, there can be no assurance that additional expenses associated with
remedial costs or compliance with 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 $4.0 billion. In the event that the Company determined, either
as a result of lower than expected revenues or higher than expected costs, that
its net regulatory assets were not in fact recoverable, it could no longer apply
the principles of SFAS No. 71 and would be required to record a non-cash charge
against income in the amount of the remaining unamortized net regulatory assets.
S-12
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed and principally traded on the New York
Stock Exchange. The table below sets forth the high and low sales prices of the
Common Stock for the fiscal periods indicated as reported in The Wall Street
Journal as New York Stock Exchange Composite Transactions. No dividends were
paid on the Common Stock during such period.
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
<S> <C> <C>
HIGH LOW
<CAPTION>
($) ($)
<S> <C> <C>
Calendar 1996
First Quarter............................................................... 10 1/8 6 1/2
Second Quarter.............................................................. 8 5/8 6 1/2
Third Quarter............................................................... 8 7/8 6 3/4
Fourth Quarter.............................................................. 10 7 5/8
Calendar 1997
First Quarter............................................................... 11 1/8 8 1/8
Second Quarter.............................................................. 9 7 7/8
Third Quarter............................................................... 10 1/16 8 1/4
Fourth Quarter.............................................................. 10 9/16 9 1/16
Calendar 1998
First Quarter............................................................... 13 9/16 10 1/8
Second Quarter (through May 29, 1998)....................................... 13 11
</TABLE>
The closing price of the Company Common Stock on May 29, 1998 was reported
to have been $12 3/8.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on the Common Stock
since 1996. The Company currently intends to retain future earnings to repay
indebtedness and therefore, does not anticipate paying any cash dividends in the
immediate future. The Company is limited in its ability to pay cash dividends in
respect of its Common Stock pursuant to the PowerChoice Agreement, the indenture
governing the Notes and the Company's senior bank facility. Any future
determination to declare and pay dividends will be made by the Board of
Directors after evaluating the Company's earnings, cash flow, financial
position, capital requirements, contractual agreements, regulatory restrictions,
competitive position, and such other factors as the Board of Directors deems
relevant.
S-13
<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 MRA Financing, 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 Supplement.
<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 2,272,078
Retained earnings.................................................................. 814,560 691,060
------------ -------------
2,739,957 3,150,457
------------ -------------
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.............................................................. -- 322,000
Other long-term debt............................................................... 165,299 165,299
------------ -------------
Total long-term debt........................................................... 3,485,364 6,757,364
Less--Long-term debt due within one year....................................... 67,065 67,065
------------ -------------
3,418,299 6,690,299
------------ -------------
Total capitalization......................................................... $ 6,674,866 $ 10,357,366
------------ -------------
------------ -------------
</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.
S-14
<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 Supplement, as adjusted to give effect to (i) the consummation
of the MRA; (ii) the consummation of the MRA Financing; (iii) the issuance to
the IPP Parties of approximately 42.9 million shares of Common Stock, less the
number of Shares offered hereby; 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 MRA Financing, 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 MRA Financing,
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 issued directly to the IPP Parties and that of the Shares offered
hereby can only be determined at the date of the closing of the MRA and the
Offering, respectively, 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 and the Offering. The
ultimate amount of 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 with respect to the portion of the 42.9 million shares issued
directly to the IPP Parties, and the actual offering price with respect to the
Shares offered hereby. Using the Company's closing Common Stock price on March
26, 1998 of $12 7/16 per share, multiplied by approximately 42.9 million shares,
the estimated charge to expense would be approximately $190.0 million. 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 Supplement. 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 MRA Financing, 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.
S-15
<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)
(39,200)(2) $ 3,213,941
Gas............................................................ 656,963 656,963
----------- ---------------- -----------
3,966,404 (95,500) 3,870,904
----------- ---------------- -----------
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 48,000 606,839
Other income..................................................... 24,997 (6,400)(5) 18,597
----------- ---------------- -----------
Income before interest charges................................... 583,836 41,600 625,436
Interest charges................................................. 273,906 16,500(6)
248,400(7)
(27,000)(7) 511,806
----------- ---------------- -----------
Income before federal and foreign income taxes................... 309,930 (196,300) 113,630
Federal and foreign income taxes................................. 126,595 (68,700)(8) 57,895
----------- ---------------- -----------
Net income....................................................... 183,335 (127,600) 55,735
Dividends on preferred stock..................................... 37,397 37,397
----------- ---------------- -----------
Balance available for common stock............................... $ 145,938 $ (127,600) $ 18,338
----------- ---------------- -----------
----------- ---------------- -----------
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 $ 0.10
OTHER OPERATING DATA:
EBITDA (10).................................................... $ 961,502 $ 1,426,702
</TABLE>
See accompanying notes to Pro Forma Condensed Statements of Income
S-16
<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)
(9,800)(2) $ 839,294
Gas............................................................ 235,235 235,235
---------- -------------- ----------
1,098,404 (23,875) 1,074,529
---------- -------------- ----------
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 10,500 144,797
---------- -------------- ----------
Other income..................................................... 4,225 (1,600)(5) 2,625
---------- -------------- ----------
Income before interest charges................................... 138,522 8,900 147,422
Interest charges................................................. 65,590 4,125(6)
61,000(7)
(6,750)(7) 123,965
---------- -------------- ----------
Income before federal and foreign income taxes................... 72,932 (49,475) 23,457
Federal and foreign income taxes................................. 52,569 (17,325)(8) 35,244
---------- -------------- ----------
Net income (loss)................................................ 20,363 (32,150) (11,787)
Dividends on preferred stock..................................... 9,223 9,223
---------- -------------- ----------
Balance available for common stock............................... $ 11,140 $ (32,150) $ (21,010)
---------- -------------- ----------
---------- -------------- ----------
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 $ (0.11)
OTHER OPERATING DATA:
EBITDA (10).................................................... $ 222,273 $ 337,073
</TABLE>
See accompanying notes to Pro Forma Condensed Statements of Income
S-17
<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)
(39,200)(2) $ 3,199,741
Gas............................................................ 605,735 605,735
------------ -------------- ------------
3,900,976 (95,500) 3,805,476
------------ -------------- ------------
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 42,000 503,199
Other income..................................................... 22,122 (6,400)(5) 15,722
------------ -------------- ------------
Income before interest charges................................... 483,321 35,600 518,921
Interest charges................................................. 271,958 16,500(6)
244,000(7)
(27,000)(7) 505,458
------------ -------------- ------------
Income before federal and foreign income taxes................... 211,363 (197,900) 13,463
Federal and foreign income taxes................................. 110,687 (69,300)(8) 41,387
------------ -------------- ------------
Net income (loss)................................................ 100,676 (128,600) (27,924)
Dividends on preferred stock..................................... 37,221 37,221
------------ -------------- ------------
Balance available for common stock............................... $ 63,455 $ (128,600) $ (65,145)
------------ -------------- ------------
------------ -------------- ------------
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 $ (0.35)
OTHER OPERATING DATA:
EBITDA (10).................................................... $ 859,687 $ 1,318,887
</TABLE>
See accompanying notes to Pro Forma Condensed Statements of Income
S-18
<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
Supplement.
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 MRA Financing, 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 March 26, 1998 of $12 7/16 per
share, multiplied by approximately 42.9 million shares, the estimated charge to
expense would be approximately $190.0 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 with respect to the portion of the 42.9 million shares
issued directly to the IPP Parties, and the actual offering price with respect
to the Shares offered hereby.
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
S-19
<PAGE>
prepare its PowerChoice proposal and the estimated weighted average interest
rate of 7.27% assumed for the Senior Notes portion of the Debt Offering. The
amount of the deferral for the year ended December 31, 1997, the three months
ended March 31, 1998 and the twelve months ended March 31, 1998 would be $39.2
million, $9.8 million and $39.2 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, that 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 $78.3 million incurred and capitalized in connection with the MRA
Financing. The debt issuance costs will be amortized over the life of the
indebtedness represented by the Debt Offering using the interest method and
would have amounted to $16.5 million, $4.1 million and $16.5 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 Debt Offering and borrowings that would have been drawn under
the Company's receivables facility in order to
S-20
<PAGE>
fund the Company's cash obligations under the MRA. Interest charges on the
indebtedness represented by the Senior Notes portion of the Debt Offering were
calculated assuming a weighted average interest rate of 7.27% and amounted to
$214.4 million, $53.7 million and $214.4 million for the year ended December 31,
1997, the three months ended March 31, 1998 and the twelve months ended March
31, 1998, respectively. A 1/8% change in the assumed interest rate on the Senior
Notes portion of the Debt Offering would impact interest charges by $3.7 million
per year. The amount of accreted interest on the Senior Discount Notes was
calculated assuming an interest rate of 9% and amounted to $29.0 million, $7.3
million and $29.0 million for the year ended December 31, 1997, the three months
ended March 31, 1998 and the twelve months ended March 31, 1998, respectively,
of which $27.0 million, $6.7 million and $27.0 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 $2.0
million, $0.6 million and $2.0 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 $5.0 million,
$0.0 million and $0.6 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 $68.7 million, $17.3 million and $69.3
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 $196.3 million, $49.5 million and $197.9 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, a portion of which is being offered hereby and the remainder being issued
directly to the IPP Parties pursuant to 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 Supplement.
S-21
<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 $ 3,387,800(1)
(3,831,600 (2)
8,000(3) 456
Other current assets......................................... 829,872 75,000(4)
137,800(5)
(8,000 (3) 1,034,672
------------ ------------- -------------
1,266,128 (231,000) 1,035,128
------------ ------------- -------------
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 71,800(7) 144,045
------------ ------------- -------------
Total assets................................................... $ 9,707,583 $ 3,828,800 $ 13,536,383
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See accompanying notes to Pro Forma Condensed Balance Sheet
S-22
<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............................... 1,780,978 491,100(8) 2,272,078
Retained earnings............................................... 814,560 (123,500 (9) 691,060
------------ ------------ -------------
2,739,957 410,500 3,150,457
Preferred stock................................................... 516,610 516,610
Long-term debt.................................................... 3,418,299 3,272,000(1) 6,690,299
------------ ------------ -------------
Total capitalization............................................ 6,674,866 3,682,500 10,357,366
Current liabilities............................................... 613,524 613,524
Regulatory liabilities............................................ 239,880 239,880
Other liabilities................................................. 2,179,313 75,000(4)
137,800(5)
(66,500 (9) 2,325,613
------------ ------------ -------------
Total liabilities and stockholders' equity...................... $ 9,707,583 $ 3,828,800 $ 13,536,383
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes to Pro Forma Condensed Balance Sheet
S-23
<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 Supplement.
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 MRA Financing, 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 MRA Financing, the PowerChoice Agreement and other matters. All of the
following adjustments are based on the assumption that the consummation of the
MRA and the MRA Financing, and the principal terms of the PowerChoice Agreement
excluding the Genco Divestiture had occurred on March 31, 1998. Furthermore, all
pro forma adjustments related to the Offering assume the issuance of 15,674,149
shares of Common Stock at an assumed offering price of
$12 7/16, based on the price of the Common Stock at the close of business on
March 26, 1998.
The unaudited Pro Forma Condensed Balance Sheet includes the following pro
forma adjustments based on the assumptions described below:
(1) To reflect (i) the gross cash proceeds of $194.9 million received by the
Company from the Offering reduced for the payment of the estimated equity
issuance costs of $7.3 million; and (ii) the gross cash proceeds of $3.272
billion received by the Company from the Debt Offering reduced for the payment
of the remaining debt issuance costs estimated by the Company to be
approximately $71.8 million.
(2) To reflect the payment of (i) cash compensation of $3.631 billion paid to
the IPP Parties pursuant to the terms of the MRA; (ii) $187.6 million of cash
proceeds paid to certain IPP Parties in lieu of a portion of the 42.9 million
shares of Common Stock to be issued to them pursuant to the MRA; and (iii) $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 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) 42.9 million shares
of Common Stock offered hereby and issued directly to the IPP Parties valued at
an aggregate of $344.0 million or $8 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
S-24
<PAGE>
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 $71.8 million resulting from the Debt Offering.
(8) To reflect the issuance of approximately 42.9 million shares of Common
Stock, a portion of which is being offered hereby and the remainder being issued
directly to the IPP Parties pursuant to the MRA. These shares will be valued at
the closing price of the Common Stock on the date of the MRA closing with
respect to the portion of the 42.9 million shares issued directly to the IPP
Parties and the actual offering price with respect to the Shares offered hereby.
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 March 26, 1998,
or $12 7/16. This adjustment to common stockholders' equity will change based on
the actual value of such shares on the date of the consummation of the MRA and
the Offering.
(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 March 26, 1998 of
$12 7/16 multiplied by approximately 42.9 million shares. The ultimate amount of
the charge to expense will be based upon the Company's Common Stock price on the
date of the MRA closing with respect to the portion of the 42.9 million shares
issued directly to the IPP Parties, and the actual offering price with respect
to the Shares offered hereby.
S-25
<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 SUPPLEMENT AND THE ACCOMPANYING
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
SUPPLEMENT.
The unaudited Pro Forma Condensed Financial Statements give effect to (i)
the consummation of the MRA; (ii) the consummation of the MRA Financing; (iii)
the issuance to the IPP Parties of approximately 42.9 million shares of Common
Stock less the number of Shares offered hereby; 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
MRA Financing, 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 $95.5 million, $23.9 million and
$95.5 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 Senior
Notes portion of the Debt Offering for purposes of preparing the Company's
PowerChoice proposal versus the current estimates of 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.
S-26
<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
$48.0 million, $10.5 million and $42.0 million to $606.8 million, $144.8 million
and $503.2 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'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 Debt Offering and usage of the Company's receivables
facility would have increased interest charges on a pro forma basis by
approximately $237.9 million, $58.4 million and $233.5 million to $511.8
million, $124.0 million and $505.5 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 $127.6
million, $32.2 million and $128.6 million to net income (loss) of $55.7 million,
$(11.8) million and $(27.9) 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 ("NOL") 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 Debt 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
S-27
<PAGE>
to the MRA. In addition, the Company would have available additional borrowings
of $275.0 million under its senior bank facility and, under the financial
covenants set forth in the indenture governing the Notes, would have had the
ability to incur additional indebtedness, subject to certain limitations.
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
Company's First Mortgage Bonds and the indebtedness represented by the Debt
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 will be required
to refinance its $804.4 million senior bank facility and is currently
negotiating to extend the expiration of such 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.
S-28
<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 Supplement.
<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>
S-29
<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
Capital expenditures(2)................ 519,612 490,124 345,804 352,049 290,757 53,552 132,354
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 Supplement.
(2) 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.
S-30
<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 MRA Financing 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 (representing approximately 23% of the Company's
outstanding shares following such issuance). A portion of the 42.9 million
shares of Common Stock is being issued in the Offering and the net proceeds
thereof will be paid to the IPP Parties. The remainder of the 42.9 million
shares of Common Stock will be issued directly to the IPP Parties. The proceeds
of the Debt Offering, together with cash on hand, will be used to fund the
Company's cash obligation under the MRA. The principal effects of the MRA are to
significantly reduce the Company's existing payment obligations under the PPAs,
which consisted of approximately 2,700 MW of capacity in aggregate for all
existing PPAs at March 31, 1998.
The Company expects that the MRA will result in a significant improvement in
cash flow resulting from the reduction in the payment obligation (both in
nominal dollars and PPA duration) under the existing PPAs. The savings in annual
energy payments will yield significant free cash flow that can be dedicated to
the repayment of the Notes.
Under the terms of the MRA, the Company's significant long-term and
escalating IPP payment obligations 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
S-31
<PAGE>
be amended to reflect a shorter term (17 years) and a lower stream of fixed unit
prices. The Company's expected future commitment under the restated and amended
contracts ranges from approximately $210 million in the first year to $290
million in the tenth year.
Against the Company's forecast of market energy prices, the amended and
restated PPAs represent an expected above-market payment obligation. The Company
believes, however, that its portfolio of amended and restated PPAs could provide
it and its customers with a hedge against significant upward movement in market
prices for electricity. The portfolio of amended and restated PPAs and market
purchases contain terms that are more responsive than the existing PPAs to
competitive market price changes.
Upon consummation of the MRA, the IPP Parties are expected to own up to
approximately 42.9 million shares of the Common Stock, representing
approximately 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 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 Senior Notes portion of
the Debt Offering. In years four and five of its rate plan, the Company can
request an annual increase in prices subject to a cap of 1% of the all-in price,
excluding commodity costs (e.g., transmission, distribution, nuclear, and
forecasted CTC). In addition to the price cap, the PowerChoice Agreement
provides for the recovery of deferrals established in years one through four and
cost variations resulting from indexing provisions of the MRA financial
contracts. The aggregate of the price cap increase and recovery of deferrals is
subject to an overall limitation of inflation.
Under the terms of the PowerChoice Agreement, all of the Company's customers
will be able to choose their electricity supplier in a competitive market by
December 1999. The Company will continue to distribute electricity through its
transmission and distribution systems and would be obligated to be the so-called
provider of last resort for those customers who do not exercise their right to
choose a new electricity supplier.
S-32
<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, a portion of which is being offered hereby with the remainder
being issued directly to the IPP Parties, 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 Common Stock issued
directly to the IPP Parties and that of the Shares offered hereby can only be
determined at the date of the closing of the MRA and the Offering, respectively,
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 and the Offering. The ultimate amount of 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 with respect to
the portion of the 42.9 million shares issued directly to the IPP Parties, and
the actual offering price with respect to the Shares offered hereby. Using the
Company's closing Common Stock price on March 26, 1998 of $12 7/16 per share,
multiplied by approximately 42.9 million shares, the estimated charge to expense
would be approximately $190.0 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.
S-33
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income tax consequences of the ownership and disposition of Shares applicable to
Non-U.S. Holders (as defined below) of Shares. In general, a "Non-U.S. Holder"
is a person other than: (i) an individual who is a citizen or resident of the
United States for federal income tax purposes; (ii) a corporation or other
entity taxable as a corporation organized in or under the laws of the United
States or a political subdivision thereof; (iii) an estate the income of which
is subject to United States federal income taxation regardless of its source; or
(iv) a trust if a United States court is able to exercise primary jurisdiction
over administration of the trust and one or more United States persons have
authority to control all substantial decisions of the trust. This discussion is
based on current law and is provided for general information only. The
discussion does not address aspects of United States federal taxation other than
income taxation and does not address all aspects of federal income taxation.
This discussion does not consider any specific facts or circumstances that may
apply to a particular Non-U.S. Holder and does not address all aspects of United
States federal income tax law that may be relevant to Non-U.S. Holders subject
to special treatment under such law (for example, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers of certain
United States expatriates). ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-U.S. CURRENT AND POSSIBLE FUTURE INCOME AND OTHER TAX CONSEQUENCES OF
HOLDING AND DISPOSING OF SHARES.
In general, the gross amount of dividends paid to a Non-U.S. Holder will be
subject to United States withholding tax at a 30% rate (or any lower rate
prescribed by an applicable tax treaty) unless the dividends are (i) effectively
connected with a trade or business carried on by the Non-U.S. Holder within the
United States and a Form 4224 is filed with the withholding agent or (ii) if
certain tax treaties apply, are attributable to a United States permanent
establishment of the Non-U.S. Holder. If either exception applies, the dividend,
while not subject to withholding, may be taxed at ordinary U.S. federal income
tax rates. A Non-U.S. Holder may be required to satisfy certain certification
requirements in order to claim the benefit of an applicable treaty rate or
otherwise claim a reduction of, or exemption from, the withholding obligation
pursuant to the above described rules. In the case of a Non-U.S. Holder that is
a corporation, effectively connected income may also be subject to an additional
branch profits tax (which is generally imposed on a foreign corporation at a
rate of 30% of the deemed repatriation from the United States of "effectively
connected earnings and profits" or such lower rate as an applicable tax treaty
may provide).
SALE OF COMMON STOCK
Generally, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the disposition of Shares unless: (i) the
Company has been, is, or becomes a "U.S. real property holding corporation" for
federal income tax purposes and certain other requirements are met; (ii) the
gain is effectively connected with a trade or business carried on by the
Non-U.S. Holder within the United States, or, alternatively, if certain tax
treaties apply, attributable to a United States permanent establishment
maintained by the Non-U.S. Holder (in which case such gain will be subject to
tax at the rates and in the manner applicable to U.S. persons, and, if the
holder is a foreign corporation, the branch profits tax may also apply); or
(iii) the Shares are disposed of by an individual Non-U.S. Holder, who holds the
Shares as a capital asset and is present in the United States for 183 days or
more in the taxable year of the disposition and certain other conditions are
met. Non-U.S. Holders should consult applicable treaties, which may exempt from
United States taxation gains realized upon the disposition of Shares in certain
cases.
S-34
<PAGE>
BACKUP WITHHOLDING, INFORMATION REPORTING REQUIREMENTS AND QUALIFICATION FOR
TREATY BENEFITS
On October 6, 1997, the Internal Revenue Service ("IRS") issued final
regulations relating to withholding, information reporting and backup
withholding that modify current certification procedures and forms and clarify
reliance standards (the "Final Regulations"). The Final Regulations generally
will be effective with respect to payments made after December 31, 1999.
Except as provided below, this section describes rules applicable to
payments made on or before December 31, 1999. Backup withholding (which
generally is a withholding tax imposed at the rate of 31% on certain payments to
persons who fail to furnish the information required under the United States
information reporting and backup withholding rules) generally will not apply to
(i) dividends paid to Non-U.S. Holders that are subject to the 30% withholding
discussed above (or that are not so subject because a tax treaty applies that
reduces or eliminates such 30% withholding) or (ii) dividends paid on the Shares
to a Non-U.S. Holder at an address outside the United States. The Company will
be required to report annually to the IRS and to each Non-U.S. Holder the amount
of dividends paid to, and the tax withheld with respect to, such holder,
regardless of whether any tax was actually withheld. This information may also
be made available to the tax authorities in the Non-U.S. Holder's country of
residence.
In the case of a Non-U.S. Holder that sells Shares to or through a United
States office of a broker, the broker must backup withhold at a rate of 31% and
report the sale to the IRS, unless the holder certifies its Non-U.S. status
under penalties of perjury or otherwise establishes an exemption. In the case of
a Non-U.S. Holder that sells Shares to or through the foreign office of a United
States broker, or a foreign broker with certain types of relationships to the
Unites States, the broker must report the sale to the IRS (but need not
withhold) unless the broker has documentary evidence in its files that the
seller is a Non-U.S. Holder or certain other conditions are met, or the holder
otherwise establishes an exemption. A Non-U.S. Holder will generally not be
subject to information reporting or backup withholding if such Non-U.S. Holder
sells the Shares to or through a foreign office of a non-United States broker.
Any amount withheld under the backup withholding rules from a payment to a
holder is allowable as a credit against such holder's U.S. federal income tax,
which may entitle the holder to a refund, provided that the holder furnishes the
required information to the IRS. In addition, certain penalties may be imposed
by the IRS on a holder who is required to supply information but does not do so
in the proper manner.
Prospective purchasers of the Shares are urged to consult their own tax
advisors as to the effect, if any, of the Final Regulations on their purchase,
ownership and disposition of the Common Stock.
S-35
<PAGE>
THE SHARE EXCHANGE
EXCHANGE AGREEMENT
In the Share Exchange: (i) each share of the Company Common Stock
outstanding immediately prior to the effective time of the Share Exchange will
be exchanged for one new share of Holdings common stock; (ii) Holdings will
become the owner of all outstanding Company Common Stock; and (iii) the shares
of Holdings common stock held by the Company immediately prior to the Share
Exchange will be canceled.
As a result, upon completion of the Share Exchange, Holdings will become a
holding company, the Company will become a subsidiary of Holdings, and all of
Holdings common stock outstanding immediately after the Share Exchange will be
owned by the former holders of the Company Common Stock outstanding immediately
prior to the share exchange. Following the Share Exchange, certain of the
Company's existing non-utility subsidiaries will be transferred to Holdings and
become subsidiaries of Holdings.
The Company's outstanding preferred stock will not be exchanged in the Share
Exchange but will continue as shares of the Company preferred stock. The Share
Exchange will not change the rights of the holders of such shares as currently
provided in the Company's Amended Certificate of Incorporation. Debt of the
Company will remain unchanged and will continue as outstanding obligations of
the Company after the Share Exchange.
CONDITIONS TO EFFECTIVENESS OF THE SHARE EXCHANGE
The Share Exchange is subject to the satisfaction of the following
conditions (in addition to adoption of the Exchange Agreement by the holders of
the Company Common Stock): (i) all necessary orders, authorizations, approvals
or waivers from the PSC and all other jurisdictive regulatory bodies, boards or
agencies have been received, remain in full force and effect, and do not
include, in the sole judgment of the Board of Directors of the Company,
unacceptable conditions; and (ii) shares of Holdings common stock to be issued
in connection with the exchange have been listed, subject to official notice of
issuance, by the New York Stock Exchange.
Following satisfaction of these conditions, the Share Exchange will become
effective immediately following the close of business on the date of filing with
the New York Department of State of a certificate of exchange pursuant to
Section 913(d) of the New York Business Corporation Law. The Company cannot
predict when all conditions will be satisfied, but expects that the share
exchange will become effective in the first quarter of calendar 1999.
LISTING OF HOLDINGS COMMON STOCK
Holdings is applying to have its common stock listed on the New York Stock
Exchange. It is expected that such listing will become effective at the
effective time of the Share Exchange. The stock exchange ticker symbol of
Holdings common stock will be "NMK", and quotations will be carried in
newspapers as they have been for the Company Common Stock. Following the Share
Exchange, the Company Common Stock will no longer trade and will be delisted and
no longer registered pursuant to Section 12 of the Securities Exchange Act of
1934.
S-36
<PAGE>
UNDERWRITING
Subject to the terms of the Underwriting Agreement (the "Underwriting
Agreement") among the Company and Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill"), Smith Barney Inc. ("Smith Barney"), Wasserstein Perella Securities,
Inc. ("Wasserstein") and CIBC Oppenheimer Corp. ("Oppenheimer" and together with
DLJ, Merrill, Smith Barney and Wasserstein, the "Underwriters"), the
Underwriters have agreed to purchase from the Company an aggregate of 15,674,149
Shares in the amounts set forth opposite each such Underwriter's name in the
table below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..............................
Smith Barney Inc................................................................
Wasserstein Perella Securities, Inc.............................................
CIBC Oppenheimer Corp...........................................................
------------
Total....................................................................... 15,674,149
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the Shares offered hereby are subject to approval of
certain legal matters by counsel and to certain other conditions. If any of the
Shares are purchased by the Underwriters pursuant to the Underwriting Agreement,
the Underwriters are obligated to purchase all Shares offered hereby.
The Company has been advised by DLJ, as representative of the Underwriters,
that the Underwriters propose to offer the Shares to the public initially at the
price to the public set forth on the cover page of this Prospectus Supplement
and to certain dealers (who may include the Underwriters) at such price less a
concession not to exceed $ per share. The Underwriters may allow, and such
dealers may reallow, discounts not in excess of $ per share to certain other
dealers. After the Offering, the public offering price, the concession and the
discount to the dealers may be changed.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
payments that the Underwriters may be required to make in respect thereof.
The Shares offered hereby are being sold by the Company pursuant to the MRA.
Such Shares are being offered hereby in lieu of a portion of the 42.9 million
shares that would have been issued to certain IPP Parties (the "Electing IPP
Parties") who elect instead to receive the net proceeds of the Offering. Each of
the IPP Parties has agreed, until 45 days after the closing of the Offering, not
to offer, sell or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock, or enter into any swap or similar arrangement with
respect thereto, without the prior written consent of DLJ, as representative of
the Underwriters, except in certain limited circumstances. The IPP Parties who
are subject to the above restriction will be entitled to receive an aggregate of
approximately 42.9 million shares of Common Stock under the MRA (which includes
the Shares being sold in this Offering as to which the Electing IPP Parties will
be entitled to receive the net proceeds).
DLJ is also acting as the underwriter in connection with the Debt Offering
and will receive customary discounts and commissions therewith. The net proceeds
of the Offering, together with the net proceeds of the Debt Offering, are being
used to make cash payments to the IPP Parties in connection with the MRA. 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
S-37
<PAGE>
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.
VALIDITY OF THE SHARES
The validity of the Shares offered hereby will be passed upon for the
Company by Sullivan & Cromwell, New York, New York, counsel to the Company.
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 Supplement have
been so incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
periodic reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, New York, New York 10048
and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the prescribed rates. The Commission maintains a
website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Common Stock of the Company is listed on the New York
Stock Exchange, 20 Broad Street, New York, New York 10005, where reports and
other information concerning the Company may be inspected.
Additional information regarding the Company and the securities offered
hereby is contained in the Registration Statement on Form S-3 and the exhibits
thereto (the "Registration Statement") filed with the Commission under the
Securities Act. This Prospectus Supplement 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.
S-38
<PAGE>
APPENDIX A
GLOSSARY OF CERTAIN ELECTRICITY, NATURAL GAS
AND ACCOUNTING TERMS
<TABLE>
<CAPTION>
TERM DEFINITION
<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 Distribution The delivery of electric energy to customers on a distribution system. Electric energy is
carried at high voltages along transmission lines. For consumers needing lower voltages,
it is reduced in voltage at a substation and delivered over primary distribution lines
extending throughout the area where the electricity is distributed. For users needing
lower voltage, the voltage is reduced once again by a distribution transformer or a line
transformer. At this point it changes from primary to secondary distribution voltage.
GRT Gross Receipts Tax.
GwH Gigawatt-hours: one gigawatt hour equals one billion 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>
PROSPECTUS
June 1, 1998
$1,160,000,000
NIAGARA MOHAWK POWER CORPORATION
FIRST MORTGAGE BONDS
PREFERRED STOCK ($25 PAR VALUE)
PREFERRED STOCK ($100 PAR VALUE) AND/OR
COMMON STOCK ($1 PAR VALUE)
---------------------
Niagara Mohawk Power Corporation (the "Company") from time to time may offer
its First Mortgage Bonds (the "New Bonds"), its Preferred Stock ($25 par value),
its Preferred Stock ($100 par value) (collectively the "New Preferred Stock")
and its Common Stock ($1 par value) (the "Additional Common Stock" and, together
with the New Bonds and the New Preferred Stock, the "Securities") at prices and
on terms to be determined at the time of sale. The Securities offered pursuant
to this Prospectus may be issued in one or more series or issuances and will be
limited to an aggregate public offering amounting to $1,160,000,000.
For each offering of Securities for which this Prospectus is being
delivered, there will be an accompanying Prospectus Supplement (the "Prospectus
Supplement") that sets forth, with respect to New Bonds, the specific series
designation, aggregate principal amount, rate (or method of calculation) and
time of payment of interest, maturity, any redemption terms, credit enhancement,
if any, and other specific terms, if any, of the series of New Bonds in respect
of which this Prospectus is being delivered; with respect to New Preferred
Stock, the number of shares, the specific title and par value, any dividend,
liquidation or redemption terms, the dividend payment dates and other specific
terms, if any, of the series of New Preferred Stock in respect of which this
Prospectus is being delivered; and with respect to Additional Common Stock, the
number of shares and the other specific terms, if any, of the offering thereof
in respect of which this Prospectus is being delivered. See "Description of New
Bonds," "Description of New Preferred Stock," and "Description of Additional
Common Stock."
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol NMK.
The Company may sell the Securities through underwriters, through dealers,
directly to one or more institutional purchasers or through agents. If any
underwriters, dealers or agents are involved in any sale of the Securities in
respect of which this Prospectus is being delivered, the Prospectus Supplement
will set forth the terms of the offering of the Securities offered thereby,
including the name or names of any underwriters, dealers or agents, the purchase
price of such Securities and the proceeds to the Company from such sale, any
underwriting discounts and other items constituting underwriters' compensation
and any initial public offering price and any discounts or concessions allowed
or reallowed or paid to dealers. See "Plan of Distribution."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
periodic reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, New York, New York 10048
and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the prescribed rates. The Commission maintains a
website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Common Stock of the Company is listed on the New York
Stock Exchange, 20 Broad Street, New York, New York 10005, where reports and
other information concerning the Company may be inspected.
Additional information regarding the Company and the securities offered
hereby is contained in the Registration Statement on Form S-3 and the exhibits
thereto (the "Registration Statement") filed with the Commission under the
Securities Act. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is made to the Registration Statement, which may be inspected without
charge at, and copies of which may be obtained at prescribed rates from the
Commission at, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are hereby incorporated by reference in this Prospectus the following
documents heretofore filed with the Commission pursuant to the 1934 Act:
1. The Company's Annual Report on Form 10-K/A for the year ended December
31, 1997.
2. The Company's Current Report on Form 8-K dated February 11, 1998.
3. The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the 1934 Act after the date of this Prospectus and prior to the
termination of the offering made by this Prospectus shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in an incorporated
document shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed incorporated document modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of any such person, a copy of any or
all of the documents referred to above which have been or may be incorporated by
reference in this Prospectus. Requests for such copies should be directed to Mr.
Leon T. Mazur, Manager--Investor Relations, Niagara Mohawk Power Corporation,
300 Erie Boulevard West, Syracuse, New York 13202, telephone number: (315)
474-1511.
THE COMPANY
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
2
<PAGE>
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 of electricity. The Company's principal
executive offices are located at 300 Erie Boulevard West, Syracuse, New York
13202 and its telephone number is (315) 474-1511.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratio of earnings to fixed
charges for the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
TWELVE MONTHS
ENDED MARCH 31,
- ------------------
1998
1.7x 2.0x 1.6x 2.3x 1.9x 2.3x
</TABLE>
For the purpose of computing the historical ratio of earnings to fixed
charges in the above table, earnings consist of net income plus federal and
foreign taxes based on income or profits, and fixed charges. Fixed charges
consist of interest charges plus a portion of rentals which is deemed
representative of the interest factor.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
TWELVE MONTHS
ENDED MARCH 31,
- ------------------
1998
1.4x 1.7x 1.3x 1.9x 1.6x 2.0x
</TABLE>
For the purpose of computing the historical ratio of earnings to combined
fixed charges and preferred stock dividends in the above table, earnings consist
of net income plus Federal and foreign taxes based on income or profits, and
fixed charges. Fixed charges consist of interest charges and preferred stock
dividend requirements of subsidiaries plus a portion of rentals which is deemed
representative of the interest factor. Preferred Stock dividends have been
increased by an amount representing the pre-tax earnings required to cover such
dividends.
APPLICATION OF PROCEEDS
The proceeds to the Company from the sale of the Securities will be used to
finance the Company's construction program, to refund existing long-term debt
and preferred stock, to reduce short-term debt and for other corporate purposes.
See the Prospectus Supplement for a description of the Company's construction
program and its proposed refunding of long-term debt and preferred stock and
reduction of short-term debt and to fund the Company's obligations under the
Master Restructuring Agreement dated July 9, 1997, as amended, among the Company
and 14 independent power producers.
3
<PAGE>
DESCRIPTION OF NEW BONDS
The New Bonds are to be issued under a mortgage indenture between the
Company and Marine Midland Bank, N.A., as Trustee (the "Trustee"), dated as of
October 1, 1937, as heretofore supplemented and amended and as to be
supplemented by a separate supplemental indenture (the "Supplemental Indenture")
creating each series of New Bonds to be offered under this Prospectus and the
accompanying Prospectus Supplement. The Mortgage Trust Indenture dated as of
October 1, 1937 between the Company and the Trustee (the "Mortgage"), including
the form of the Supplemental Indenture, has been filed or incorporated by
reference as an exhibit to the registration statement. The following brief
summaries of certain provisions contained in the Mortgage do not purport to be
complete, use certain capitalized terms (not otherwise defined herein) defined
in the Mortgage, and are qualified in their entirety by express reference to the
cited provisions of the Mortgage.
TERMS OF NEW BONDS
Reference is made to the Prospectus Supplement which accompanies this
Prospectus for the following terms and other information with respect to the New
Bonds being offered thereby: (1) the designation and aggregate principal amount
of such New Bonds; (2) the date on which such New Bonds will mature; (3) the
rate per annum at which such New Bonds will bear interest and the date from
which such interest shall accrue; (4) the dates on which such interest will be
payable; and (5) any redemption terms or other specific terms applicable to the
New Bonds. The New Bonds will be issued only in the form of registered Bonds
without coupons in denominations of $1,000 and multiples thereof. The New Bonds
may be exchanged for Bonds of the same series without service charge.
(SUPPLEMENTAL INDENTURE, PART I.)
SECURITY
The New Bonds, when issued, are to be secured by the Mortgage, which, in the
opinion of counsel, will constitute a direct lien on substantially all gas and
electric properties presently owned by the Company and used or useful in the
operation of the Company's properties as an integrated system, together with all
rights appertaining thereto. The Mortgage provides that substantially all
after-acquired property of such character shall become subject to the lien
thereof (except, unless the Company elects otherwise, those acquired through
merger or consolidation or through purchase of all or substantially all the
properties of any other corporation).
There are expressly reserved from the lien of the Mortgage: (1) revenues and
profits of the Mortgaged Property, cash (except cash deposited with the
Trustee), book accounts, bills and notes, materials or supplies, merchandise and
other property held for sale or resale in the usual course of business, except
to the extent permitted by law in the event of a completed default followed by
the Trustee or a receiver or trustee entering upon or taking possession of the
Mortgaged Property; (2) securities and contracts; and (3) all oil, gas and other
minerals, together with the right to remove the same.
The lien of the Mortgage is subject to (1) liens for taxes and assessments
not due and payable or being contested in good faith; (2) obligations to public
authorities as to any franchise, consent, grant, license or permit; (3) various
easements, contracts and other outstanding rights; (4) leases and other rights
of tenants and of licensees; and (5) liens on property acquired for transmission
or distribution systems or right-of-way purposes, securing indebtedness neither
assumed by the Company nor on which it customarily pays interest charges.
(GRANTING CLAUSES OF MORTGAGE.)
In the opinion of counsel, the New Bonds will rank PARI PASSU with the other
Mortgage Bonds of the Company.
The title to certain of the properties of the Company is subject to rights
and claims of parties in possession not disclosed of record, any facts which
accurate surveys would disclose, the effect of zoning ordinances, the lien of
any unpaid taxes or assessments, rights of the public in the use of streets,
roads and waterways abutting on or extending through parts of said lands,
leases, covenants, easements, liens and
4
<PAGE>
rights of various types (including mineral and gas rights), and other types of
encumbrances, none of which materially interferes with the operations of the
Company and its subsidiaries.
CREDIT ENHANCEMENT
If any series of New Bonds is entitled to the benefits of a surety bond or
other form of credit enhancement, information with respect thereto will be set
forth in a Prospectus Supplement.
ISSUE OF ADDITIONAL BONDS
The Mortgage provides that no securities may be created by the Company which
will rank ahead of the New Bonds as to security. However, the Company may, with
stated exceptions, acquire property subject to prior liens and may mortgage
after-acquired property which is not subject to the lien of the Mortgage.
Additional Bonds may be issued under the Mortgage in an unlimited amount which
will, as to security, rank PARI PASSU with the New Bonds, but only as follows
(MORTGAGE, ARTICLE FOURTH):
1. Bonds may be issued in a principal amount equal to 60% of the Cost
(as defined) to the Company of Additional Property (as defined), after
specified deductions for Additional Property theretofore made the basis of
authentication of Bonds, withdrawal of cash, release of property or other
action under the Mortgage (including compliance with the debt retirement and
maintenance funds) and for prior liens thereon.
2. Bonds of a like principal amount may, subject to certain limitations,
be issued in exchange for Bonds outstanding under the Mortgage or in
substitution for Bonds previously authenticated and delivered under the
Mortgage and retired.
3. Bonds may be issued in a principal amount equal to cash deposited
with the Trustee. Such cash may be withdrawn, subject to certain
limitations, in lieu of Bonds to which the Company may then be entitled
under the Mortgage, or may be applied to the purchase, payment or redemption
of prior lien bonds or Bonds issued under the Mortgage.
The New Bonds will be issued on the basis of Additional Property and/or
purchases, retirements or sinking fund payments of the Bonds pursuant to
paragraphs 1 and 2 above.
Bonds may not be issued in the circumstances described in paragraphs 1 and 3
above unless the Net Earnings Available for Interest Charges (defined as the
amount by which gross income for the applicable period, computed in accordance
with the Uniform Systems of Accounts for Electric and Gas Corporations
prescribed by the PSC, excluding gains from dispositions of capital assets,
exceeds expenses and other proper income charges for such period including
depreciation, obsolescence and amortization, but excluding (i) losses from
dispositions of capital assets, (ii) interest on Funded Indebtedness (as
hereinafter defined), (iii) income taxes and (iv) the effect of any increase or
decrease in income or surplus due to readjustments of property accounts on
properties existing on January 1, 1938 or changes in depreciation reserves on
properties for any period before January 1, 1944, and with the proviso that if
gross non-operating income exceeds 15% of the net earnings computed as provided
above, such excess shall be deducted from net earnings and only the balance
thereof shall be Net Earnings Available for Interest Charges) during any 12
consecutive months out of the 15 preceding months shall have been equal to at
least 1.75 times the then interest charges for one year on Funded Indebtedness
(defined to include the Bonds then to be issued and other bonds of, or assumed
by, the Company secured by liens on any property owned by the Company).
(MORTGAGE, ARTICLE FIRST, SECTION 1(Q); ARTICLE FOURTH SECTION 6, SECTION 8.)
RELEASES OF PROPERTY
Subject to certain limitations, the Company, without notice to Bondholders,
may obtain the release from the lien of the Mortgage of property (other than
cash and certain prior lien bonds) sold, exchanged, contracted to be sold or
exchanged, condemned, taken or expropriated. Any property (other than cash or
securities) received by the Company upon the release of Mortgaged Property shall
be subject to the lien of the Mortgage, and any cash or securities so received
shall, unless otherwise disposed of pursuant to some
5
<PAGE>
prior lien, become part of the security for the Bonds issued under the Mortgage.
Any moneys received by the Trustee as principal of obligations held by it
subject to the Mortgage or as proceeds of released property shall at the
Company's request be used to reimburse the Company for retirement of Bonds and
certain prior lien bonds, or to pay, purchase or redeem the same. Such cash
shall also on request be delivered to the Company in an amount equal to 166 2/3%
of the principal amount of Bonds which could have been issued under the Mortgage
in respect of Additional Property and as to which the Company forgoes the right
to issue such Bonds in exchange for the Trustee's release to it of such cash. In
the ordinary course of business and otherwise, the Company regularly obtains
from the Trustee the release of various properties from the lien of the
Mortgage. In the case of exchanges of property, no exchange shall be made if the
Funded Indebtedness of the Company is thereby increased. (MORTGAGE, ARTICLES
SIXTH AND SEVENTH.)
MAINTENANCE FUND PROVISIONS
The Company is required, within 90 days after the close of each fiscal year,
to (a) certify the Cost of Additional Property; (b) deposit with the Trustee
cash, Bonds or certain prior lien bonds; or (c) waive its right to the
authentication and delivery of the principal amount of Bonds to which it is then
entitled under the Mortgage, to the extent that the aggregate amount of
expenditures for maintenance, repairs, renewals and replacements for the period
commencing January 1, 1977 is less than the sum of 2.25% of the depreciable
property (as defined) of the Company on January 1 of each year during such
period. (MORTGAGE, ARTICLE FIFTH, SECTION 22.)
RESTRICTION OF COMMON STOCK DIVIDENDS
To the extent that the aggregate amount of expenditures for maintenance and
repairs, plus the aggregate amount credited to depreciation, retirements and
other like reserves, for the period commencing January 1, 1977 is less than the
sum of 2.25% of the depreciable property of the Company on January 1 of each
year during such period, an equivalent amount of surplus of the Company must be
reserved and held unavailable for distribution as a dividend on the common stock
of the Company. (MORTGAGE, ARTICLE FIFTH, SECTION 23.)
MODIFICATION OF MORTGAGE
The Mortgage may be modified without action by or notice to the holders of
Bonds by supplemental indenture between the Company and the Trustee, for
purposes which are not inconsistent with the terms of the Mortgage and which
shall not impair the security thereof, including corrections of property
descriptions, modifications of the Mortgage or form of bonds and coupons to
facilitate stock exchange listing requirements, or the curing of ambiguities or
manifest errors in the Mortgage. (MORTGAGE, ARTICLE TWELFTH, SECTION 1.)
The holders of 66 2/3% of the outstanding Bonds affected (exclusive of Bonds
owned by the Company or any affiliate) may by consent effect any amendment,
repeal, or modification of the Mortgage which shall not (1) alter or impair the
Company's obligation to pay the principal and interest on any Bond at the time
and place and at the rate and in the currency prescribed therein; (2) permit the
creation by the Company of any mortgage, or lien in the nature of a mortgage,
ranking prior to or PARI PASSU with the lien of the Mortgage; (3) alter
adversely to the Bondholders the character of the lien of the Mortgage; (4)
affect the Trustee without its consent; or (5) permit a reduction of the
percentage required for any change or modification of the Mortgage. (MORTGAGE,
ARTICLE TWELFTH, SECTION 2.) The Supplemental Indenture creating the New Bonds
reserves to the Company the right to amend the Indenture to provide for using
written consents, in addition to the existing provisions for bondholder
meetings, as a means of supplementing or amending the Indenture, but subject to
the restrictions contained in the preceding sentence. (SUPPLEMENTAL INDENTURE,
PART III.)
6
<PAGE>
EVENTS OF DEFAULT AND NOTICE THEREOF
The Mortgage provides that each of the following shall be a "default"
thereunder: (a) default in payment of the principal on any Bond when due; (b)
default in the payment of interest on any Bond continuing for 60 days; (c)
default in the observance by the Company of any other agreement in the Mortgage
continuing unremedied for 90 days after written notice thereof to the Company by
the Trustee, unless the Company shall have commenced and be continuing
proceedings to remedy such default--the notice of such default may be given by
the Trustee in its discretion, and shall be given upon the written request of
the holders of a majority in principal amount of the Bonds; (d)(1) adjudication
of the Company as a bankrupt by decree of a court of competent jurisdiction, or
(2) the approval by order of a petition or answer seeking reorganization or
readjustment of the Company under the Federal bankruptcy laws or other Federal
or state statute, or (3) the appointment by court order (unstayed and in effect
for 60 days) of a trustee in bankruptcy or a receiver of substantially all of
the property of the Company or of any part of the property of the Company
subject to the lien of the Mortgage; or (e)(1) the filing by the Company of a
petition in voluntary bankruptcy, or (2) the making by the Company of an
assignment for the benefit of creditors, or (3) the consent by the Company to
the appointment of a receiver of any part of its property, or (4) the filing by
the Company of a petition seeking reorganization or readjustment under the
Federal bankruptcy laws or other Federal or state statute, or (5) the filing by
the Company of a petition to take advantage of any debtors' act. (MORTGAGE,
ARTICLE NINTH, SECTION 1). Prior to exercising the powers conferred upon it to
enforce the provisions of the Mortgage, the Trustee is entitled to be provided
with indemnity satisfactory to it. (MORTGAGE, ARTICLE NINTH, SECTION 5.)
The Trustee shall, within 90 days after occurrence of any default (exclusive
of any periods of grace provided in the definitions of defaults), give to the
holders of Bonds issued under the Mortgage (in the manner provided in the
Mortgage) notice of all defaults known to the Trustee, unless such defaults
shall have been cured. In cases of default referred to in (b) and (c) above,
such notice shall not be given until at least 60 days after the occurrence of
such default. Except in the case of default in payment of principal or interest,
or in the payment of any installment upon any retirement, improvement, sinking
or purchase fund, the Trustee shall be protected in withholding such notice if
and so long as the Board of Directors, Executive Committee, Trust Committee of
directors or responsible officers of the Trustee in good faith determine that
the withholding of such notice is in the interest of the holders of the Bonds.
(MORTGAGE, ARTICLE NINTH, SECTION 18.)
The Mortgage does not contain a requirement for periodic certification as to
the absence of default or compliance with the terms of the Mortgage; however, it
is a condition to the issuance of additional Bonds (including the New Bonds)
pursuant to Article Fourth of the Mortgage that the Company not be in default
with respect to the performance or observance of any covenant or agreement
contained in the Mortgage.
7
<PAGE>
DESCRIPTION OF NEW PREFERRED STOCK
The New Preferred Stock will be fully paid and nonassessable. The Transfer
Agent is The Bank of New York, One Wall Street, New York, New York 10005. The
Company acts as dividend disbursing agent and maintains stockholder records.
The Company's Certificate of Incorporation, as amended (the "Charter") at
present authorizes four classes of capital Stock: Preferred Stock $25 par value,
Preferred Stock, $100 par value, Preference Stock, $25 par value, and Common
Stock, $1 par value. As of March 31, 1998 (i) 3,400,000 shares of the Preferred
Stock, $100 par value, were authorized and 2,322,000 shares were outstanding;
(ii) 19,600,000 shares of the Preferred Stock, $25 par value, were authorized
and 11,701,204 shares were outstanding; (iii) 8,000,000 shares of Preference
Stock, $25 par value, were authorized and no shares were outstanding; and (iv)
185,000,000 shares of the Common Stock, $1 par value, were authorized, and
144,419,351 shares were outstanding. The Preferred Stock ranks prior to the
Common Stock and Preference Stock with respect to the payment of dividends,
mandatory redemption and liquidation.
The following brief summaries of certain provisions contained in the Charter
and in the form of Certificate of Amendment to the Charter relating to the New
Preferred Stock (copies of which are filed as exhibits to the Registration
Statement or incorporated by reference) do not purport to be complete, use
certain capitalized terms (not otherwise defined herein) defined in the Charter
and in the form of Certificate of Amendment to the Charter and are qualified in
their entirety by express reference to the cited provisions of the Charter and
in the form of Certificate of Amendment to the Charter.
DIVIDENDS AND DIVIDEND RIGHTS
Dividends on the New Preferred Stock are cumulative from the date fixed by
the Board of Directors and will be payable, when and as declared by the Board of
Directors out of funds legally available therefor, at the annual rate set forth
on the cover page of the Prospectus Supplement. Payment of dividends on the
Preferred Stock is not restricted by the Company's Mortgage or any other
agreement of the Company. If dividends on any series of Preferred Stock are not
paid in full, the holders of shares of all series of Preferred Stock then
outstanding will be entitled to share ratably in the amounts available for
payment.
SINKING FUND, REDEMPTION AND LIQUIDATION
Reference is made to the Prospectus Supplement which accompanies this
Prospectus for any sinking fund, redemption terms, liquidation rights or other
specific terms applicable to the New Preferred Stock.
VOTING RIGHTS
Except as indicated below or provided by statute, the New Preferred Stock
has no voting rights. Holders of Preferred Stock, $25 par value, are entitled to
one-quarter vote per share, and holders of Preferred Stock, $100 par value, are
entitled to one vote per share. At any time when dividends payable on the
Preferred Stock are in default in an aggregate amount equivalent to four full
quarterly dividends on all shares of Preferred Stock then outstanding and
thereafter until all dividends thereon are paid or declared and set aside for
payment, the holders of the Preferred Stock are entitled, voting as a class and
regardless of series, to elect a majority of the Board of Directors as then
constituted. Consent of the holders of two-thirds of the votes of the then
outstanding Preferred Stock is required prior to the taking of certain corporate
action by the Company or its subsidiaries, including (in addition to
restrictions upon the issuance or sale of preferred stock of a subsidiary) (1)
payments or distributions out of capital or capital surplus (other than
dividends payable in stock ranking junior to the Preferred Stock) to any holder
of any stock ranking junior to the Preferred Stock; (2) payment of any Common
Stock dividend (as defined) if (a) the Common Stock dividends during a
prescribed 12-month period would exceed 75% of the net income applicable to the
Common Stock (as defined) for a related 12-month period and the pro forma stock
equity junior to the Preferred Stock (as defined) would be less than 25% of the
Company's pro forma total capitalization, each determined as of the end of such
related 12-month period, or if (b) such Common
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<PAGE>
Stock dividends would exceed 50% of such income and such pro forma stock equity
junior to the Preferred Stock would be less than 20% of the Company's pro forma
total capitalization, each determined as of the end of such related 12-month
period; (3) creation or authorization of any stock ranking prior to the
Preferred Stock with respect to the payment of dividends or upon dissolution,
liquidation or winding up of the Company, whether voluntary or involuntary, or
any obligation or security convertible into shares of any such stock; (4)
amendment, alteration, change or repeal of any of the express terms of the
Preferred Stock so as to affect the holders thereof adversely; and (5) issuance
of any shares of any series of Preferred Stock or shares ranking on a parity
with them, unless such shares are issued in connection with the redemption of,
or in exchange for, at least an equal number of outstanding shares of another
series of Preferred Stock, or unless (x) the pro forma annual interest
requirements on all indebtedness of the Company and its subsidiaries and the
annual dividend requirements on the Preferred Stock and any stock of the Company
ranking prior to or on a parity with the Preferred Stock are covered at least
one and one-half times by consolidated income (as defined) for any 12
consecutive months within the 15 calendar months immediately preceding the month
within which such issuance is authorized by the Board of Directors, and (y) the
stock equity junior to the Preferred Stock at a specified date prior to such
issuance was not less than the voluntary liquidation value of the Preferred
Stock determined at the same date. No outstanding series of Preferred Stock may
be classified or reclassified so as to affect adversely the holders of any
series of Preferred Stock without the consent of the holders of two-thirds of
the total number of shares of each such series then outstanding so affected.
Consent of the holders of a majority of the votes of the then outstanding
Preferred Stock is required prior to the taking of certain other corporate
action by the Company, including (1) issuing or assuming, or permitting any
wholly-owned subsidiary (as defined) to issue or assume, unsecured indebtedness
(for purposes other than the refunding of outstanding securities or the
redemption or other retirement of outstanding Preferred Stock of the Company or
preferred stock of such wholly-owned subsidiary) if the total principal amount
of all unsecured indebtedness of the Company and its wholly-owned subsidiaries
on a PRO FORMA basis would then exceed 10% of the aggregate of total
consolidated surplus and secured indebtedness of the Company and its
wholly-owned subsidiaries and the capital of the Company (in which connection
reference is made to an existing consent which increased such amount by $50
million as discussed under the heading "Consent of Preferred Stockholders"
below); (2) permitting any majority-owned subsidiary (as defined) to issue or
assume unsecured indebtedness for purposes other than the refunding of
outstanding securities or the redemption or other retirement of outstanding
shares of preferred stock of such subsidiary if the total principal amount of
its unsecured indebtedness on a PRO FORMA basis would then exceed 10% of the
aggregate of its surplus, capital and secured indebtedness; and (3)
consolidating under the laws of the State of New York with or into any other
corporation unless such consolidation or the issuance of the securities to be
issued in connection therewith has been ordered, approved or permitted by the
Commission under the provisions of the Public Utility Holding Company Act of
1935.
CONSENT OF PREFERRED STOCKHOLDERS
In accordance with the provisions of the Charter, the holders of a majority
of the votes of the Preferred Stock then outstanding adopted a resolution at a
meeting held December 5, 1956 consenting to the issuance by the Company of
unsecured indebtedness at any one time outstanding in a total principal amount
not exceeding 10% of the aggregate of total consolidated surplus and secured
indebtedness of the Company and its wholly-owned subsidiaries and the capital of
the Company plus $50,000,000.
OTHER RIGHTS
The holders of record of the New Preferred Stock are eligible to participate
in the Company's Dividend Reinvestment and Common Stock Purchase Plan. The
holders of the Preferred Stock have no preemptive rights.
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DESCRIPTION OF ADDITIONAL COMMON STOCK
The outstanding shares of Common Stock of the Company are, and the
Additional Common Stock will be, fully paid and nonassessable and listed on the
New York Stock Exchange. The Transfer Agent is The Bank of New York, One Wall
Street, New York, New York 10005. The Company acts as dividend disbursing agent
and maintains stockholder records.
The following brief summaries of certain provisions contained in the
Mortgage and the Charter (copies of which are filed as exhibits to the
Registration Statement or incorporated by reference) relating to the Additional
Common Stock do not purport to be complete, use certain capitalized terms (not
otherwise defined herein) defined in the Mortgage and in the Charter and are
qualified in their entirety by express reference to the Mortgage and the
Charter.
DIVIDEND RIGHTS
After payment or setting aside for payment of cumulative dividends on all
outstanding issues of Preferred and Preference Stock, the holders of Common
Stock are entitled to dividends when and as declared by the Board of Directors
out of funds legally available therefor.
Consent of the holders of two-thirds of the votes of the then outstanding
Preferred Stock is required prior to the taking of certain corporate action by
the Company or its subsidiaries, including (1) payments or distributions out of
capital or capital surplus (other than dividends payable in stock ranking junior
to the Preferred Stock) to any holder of any stock ranking junior to the
Preferred Stock, and (2) payment of any Common Stock dividend (which includes
purchases or acquisitions of and distributions or dividends on Common Stock,
other than dividends payable on Common Stock), if (a) the Common Stock dividends
during a prescribed 12-month period would exceed 75% of the net income
applicable to the Common Stock (as defined in the Charter) for a related
12-month period and the PRO FORMA stock equity junior to the Preferred Stock (as
defined in the Charter) would be less than 25% of the Company's PRO FORMA total
capitalization (as defined in the Charter), each determined as of the end of
such related 12-month period, or if (b) such Common Stock dividends would exceed
50 % of such income and such PRO FORMA stock equity junior to the Preferred
Stock would be less than 20% of the Company's total PRO FORMA capitalization,
each determined as of the end of such related 12-month period. No approval of
the holders of Preference Stock is required prior to the taking of comparable
corporate action.
The Mortgage provides that surplus of the Company shall be reserved and held
unavailable for the payment of dividends on Common Stock to the extent that the
aggregate amount of expenditures for maintenance and repairs, plus the aggregate
amount credited to depreciation, retirements and other like reserves, for the
period commencing January 1, 1977 is less than the sum of 2.25 % of the
depreciable property of the Common on January 1 of each year during such period.
Such provisions have never to date restricted the Company's surplus.
LIQUIDATION RIGHTS
Upon any dissolution, liquidation or winding up of the Company, the holders
of the Common Stock are entitled to receive PRO RATA all of the Company's assets
available for distribution to its stockholders after payment of the full
preferential amounts to which holders of stock (including Preferred and
Preference Stock) having priority over the Common Stock are entitled.
VOTING RIGHTS
The holders of the Common Stock are entitled to one vote per share. Holders
of the Company's Common Stock do not have cumulative voting rights with respect
to the election of Directors. Whenever dividends payable on Preferred Stock are
in default in an aggregate amount equivalent to four full quarterly dividends on
all shares of Preferred Stock then outstanding and thereafter until all
dividends thereon are paid or declared and set aside for payment, the holders of
the Preferred Stock are entitled to elect a majority of the Board of Directors
as then constituted. Whenever dividends payable on Preference
10
<PAGE>
Stock are in default in an aggregate amount equivalent to six full quarterly
dividends on all shares of Preference Stock then outstanding and thereafter
until all dividends thereon are paid or declared and set aside for payment, the
holders of the Preference Stock are entitled to elect two members of the Board
of Directors as then constituted. No such dividends are now in default.
The Charter contains a "fair price" provision which (i) requires the
approval of the holders of at least 75% of the combined voting power of the then
outstanding shares of the Voting Stock (all outstanding shares of capital stock
of all classes and series of the Company entitled to vote generally in the
election of directors of the Company), voting as a single class (including at
least two-thirds of the combined voting power of the outstanding shares of
Voting Stock held by shareholders other than an Interested Shareholder, as
defined in the Charter), for certain business combinations involving the Company
and any Interested Shareholder, unless (x) the business combination is approved
by a majority of Disinterested Directors (as defined in the Charter) or (y)
certain minimum price and procedural criteria are met and (ii) requires the
affirmative vote of at least 80% of the combined voting power of the Voting
Stock, voting as a single class (including at least two-thirds of the combined
voting power of the outstanding shares of Voting Stock held by shareholders
other than an Interested Shareholder), to alter, amend or repeal the "fair
price" provision or to adopt any provision inconsistent with the "fair price"
provision.
The Charter also provides for the classification of Directors, with
three-year staggered terms, and a requirement of an affirmative vote of 80% of
the outstanding shares of Voting Stock, voting together as a single class, is
required to alter, amend or repeal the provisions relating to the size and
classification of the Board of Directors and the removal of members from, and
the filling of vacancies on, the Board of Directors.
The Charter further provides that an affirmative vote of 80% of the
outstanding shares of Voting Stock, voting together as a single class, is
required to alter, amend or repeal the provisions eliminating cumulative voting
with respect to the election of Directors by the holders of Common Stock.
OTHER RIGHTS
The holders of record of the Common Stock are eligible to participate in the
Company's Dividend Reinvestment and Common Stock Purchase Plan. The holders of
the Common Stock have no preemptive rights.
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<PAGE>
PLAN OF DISTRIBUTION
The Company may sell the Securities (i) through underwriters; (ii) through
dealers; (iii) directly to one or more institutional purchasers; or (iv) through
agents. The Prospectus Supplement sets forth the terms of the offering of the
Securities offered thereby, including the name or names of any underwriters,
dealers or agents, the purchase price of such Securities and the proceeds to the
Company from such sale, any underwriting discounts and other items constituting
underwriters' compensation, any initial public offering price and any discounts
or concessions allowed or reallowed or paid to dealers. Any initial public
offering price and any discounts or concessions allowed or reallowed or paid to
dealers may be changed from time to time. Only firms named in the Prospectus
Supplement are deemed to be underwriters, dealers or agents in connection with
the Securities offered thereby.
If underwriters are used in the sale, the Securities will be acquired by the
underwriters for their own account and may be resold from time to time in one or
more transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The Securities may be
offered to the public either through underwriting syndicates represented by one
or more managing underwriters or directly by one or more of such firms. Unless
otherwise set forth in the Prospectus Supplement, the obligations of the
underwriters to purchase the Securities offered thereby will be subject to
certain conditions precedent, and the underwriters will be obligated to purchase
all such Securities if any are purchased.
Securities may be sold directly by the Company or through any firm
designated by the Company from time to time, acting as principal or as agent.
The Prospectus Supplement sets forth the name of any dealer or agent involved in
the offer or sale of the Securities in respect of which the Prospectus
Supplement is delivered and the price payable to the Company by such dealer or
any commissions payable by the Company to such agent. Unless otherwise indicated
in the Prospectus Supplement, any such agent is acting on a best-efforts basis
for the period of its appointment.
Underwriters, dealers and agents may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribution with respect to payments which the underwriters, dealers or
agents may be required to make in respect thereof. Underwriters, dealers and
agents may engage in transactions with or perform services for the Company in
the ordinary course of business.
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<PAGE>
LEGAL OPINIONS AND EXPERTS
The legality of the Securities will be passed upon for the Company by
Sullivan & Cromwell.
The financial statements incorporated in this Prospectus by reference to the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1997 have
been so incorporated in reliance on the report of Price Waterhouse, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
With respect to the unaudited consolidated financial information of the
Company for the three-month periods ended March 31, 1998 and 1997, incorporated
by reference in this Prospectus, the Company's independent accountants, Price
Waterhouse, reported that they have applied limited procedures in accordance
with professional standards for a review of such information. However, their
report dated May 14, 1998, except note 3 (third paragraph) and note 4, as to
which the date is May 29, 1998, states that they did not audit and they do not
express an opinion on that unaudited consolidated financial information. Price
Waterhouse has not carried out any significant or additional audit tests beyond
those which would have been necessary if their report had not been included.
Accordingly, the degree of reliance on their report on such information should
be restricted in light of the limited nature of the review procedures applied.
Price Waterhouse is not subject to the liability provisions of Section 1 of the
Securities Act of 1933 for their report on the unaudited consolidated financial
information because that report is not a "report" or a "Part" of the
Registration Statement prepared or certified by Price Waterhouse within the
meaning of Sections 7 and 11 of the Act.
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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 SUPPLEMENT AND THE 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 SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OFFERED HEREBY, AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS ARE
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Supplement Summary.................... S-3
Risk Factors..................................... S-9
Price Range of Common Stock...................... S-13
Dividend Policy.................................. S-13
Capitalization................................... S-14
Pro Forma Condensed Financial Statements......... S-15
Management's Discussion of Pro Forma Condensed
Financial Statements........................... S-26
Selected Historical Financial Data............... S-29
The MRA and the PowerChoice Agreement............ S-31
Certain United States Federal Income Tax
Consequences to Non-United States Holders...... S-34
The Share Exchange............................... S-36
Underwriting..................................... S-37
Validity of the Shares........................... S-38
Experts.......................................... S-38
Available Information............................ S-38
Glossary of Certain Electricity, Natural Gas and
Accounting Terms............................... A-1
PROSPECTUS
Available Information............................ 2
Incorporation of Certain Documents by
Reference...................................... 2
The Company...................................... 2
Ratio of Earnings to Fixed Charges............... 3
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends...................... 3
Application of Proceeds.......................... 3
Description of New Bonds......................... 4
Description of New Preferred Stock............... 8
Description of Additional Common Stock........... 10
Plan of Distribution............................. 12
Legal Opinions and Experts....................... 13
</TABLE>
15,674,149 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
WASSERSTEIN PERELLA SECURITIES, INC.
CIBC OPPENHEIMER
JUNE , 1998
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