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AS FILED WITH SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1998
REGISTRATION NO. 333-49769
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NIAGARA MOHAWK HOLDINGS, INC.
(Exact name of registrant as specified in charter)
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NEW YORK 4931 16-1549726
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification No.)
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WILLIAM F. EDWARDS
CHIEF FINANCIAL OFFICER
300 ERIE BOULEVARD WEST NIAGARA MOHAWK HOLDINGS, INC.
SYRACUSE, NEW YORK 13202 300 ERIE BOULEVARD WEST
(315) 474-1511 SYRACUSE, NEW YORK 13202
--------------------- (315) 474-1511
(Address, including zip code, and telephone number, including ---------------------
area code, of registrant's principal executive offices) (Name, address, including zip code, and telephone number,
--------------------- including area code, of agent for service)
---------------------
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COPIES TO:
Janet T. Geldzahler, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
(212) 558-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement has become effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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NIAGARA MOHAWK POWER CORPORATION
300 Erie Boulevard West, Syracuse, New York 13202
To the Shareholders of
Niagara Mohawk Power Corporation
You are cordially invited to attend the Annual Meeting of your Company to be
held at 10:30 a.m. on June 23, 1998 at the Buffalo Convention Center, Convention
Center Plaza, Buffalo, New York 14202.
This year's Annual Meeting marks an important milestone for Niagara Mohawk.
After years of determined effort we are poised to solve a problem that once
seemed unsolvable: rising payments to independent power producers. In addition,
we have achieved regulatory approval of our PowerChoice plan to restructure
Niagara Mohawk to face the emerging competitive utility marketplace.
At this Annual Meeting, you will be asked to approve the issuance of up to
43 million shares of Common Stock to certain independent power producers in
connection with the Company's Master Restructuring Agreement, all as described
in the accompanying Prospectus/Proxy Statement, as well as to amend the
Company's Certificate of Incorporation to increase the amount of Common Stock
the Company is authorized to issue to 250 million shares. Your Board of
Directors believes the Master Restructuring Agreement provides the best
alternative to restoring the Company's financial health and urges you to approve
the issuance of the Common Stock.
You will also be asked to approve a proposal to adopt a holding company
structure. As more fully explained in Proposal 4 of the accompanying
Prospectus/Proxy Statement, our industry is becoming increasingly subject to the
forces of market-driven competition. The formation of a holding company will
provide a structure more conducive to the pursuit of unregulated business
opportunities. Under the PowerChoice Agreement with the New York Public Service
Commission described in this Prospectus/Proxy Statement, the Company has
approximately one year within which it may adopt such a structure--a structure
which several other New York utilities have adopted or are pursuing.
Accordingly, the Board is seeking your approval at this time, although the
actual formation of a holding company would be delayed pending the regulatory
approvals described herein.
In addition, you will elect five Class I Directors. Finally, you will be
asked to vote on two shareholder proposals concerning the endorsement by the
Company of the CERES Principles and executive compensation. A current report on
the affairs of the Company will be presented at the meeting and shareholders
will have an opportunity to ask questions.
Your vote is important. Whether or not you plan to attend the Annual
Meeting, please take a moment now to record your vote, sign and date your proxy
card and promptly return it in the self-addressed envelope. No postage is
necessary. You may revoke your voted proxy at any time prior to the vote being
taken at the meeting or vote in person if you decide to attend the meeting.
We have traveled a long and challenging road since proposing PowerChoice in
October 1995. With your support we will complete this journey successfully and
turn to the future with a renewed spirit of optimism and resolve.
Sincerely,
[LOGO]
William E. Davis
Chairman of the Board and
Chief Executive Officer
<PAGE>
NOTICE OF ANNUAL MEETING
NIAGARA MOHAWK POWER CORPORATION
300 ERIE BOULEVARD WEST, SYRACUSE, NEW YORK 13202
Please take notice that the Annual Meeting of Shareholders of Niagara Mohawk
Power Corporation (the "Company" or "Niagara Mohawk") will be held at the
Buffalo Convention Center, Convention Center Plaza, Buffalo, New York 14202 on
Tuesday, June 23, 1998, at 10:30 a.m. for the following purposes:
1. To elect five directors to serve in Class I for a term expiring at
the 2001 Annual Meeting;
2. To consider and act upon the proposed issuance of up to 43 million
shares of common stock, par value $1.00 per share ("Common Stock") of
the Company to certain independent power producers pursuant to the
Master Restructuring Agreement, dated as of July 9, 1997, as amended;
3. To consider and act upon the proposed amendment of the Company's
Certificate of Incorporation to increase the number of authorized shares
of Common Stock from 185 million to 250 million;
4. Adoption of an Agreement and Plan of Exchange (a copy of which is
attached as Exhibit A to the accompanying Prospectus/Proxy Statement),
which provides that (a) the holders of shares of the Company's Common
Stock will become holders of shares of common stock of Niagara Mohawk
Holdings, Inc. ("Holdings") through a share exchange, (b) Holdings will
become the parent holding company of the Company and certain of its
non-utility subsidiaries, and (c) Niagara Mohawk and those subsidiaries
will continue to carry on their utility and other businesses as separate
subsidiaries of Holdings;
5. To consider and act upon a shareholder proposal relating to an
endorsement by the Company of the CERES Principles;
6. To consider and act upon a shareholder proposal relating to executive
compensation; and
7. To transact such other business as may be properly brought before the
meeting or any adjournment thereof.
Shareholders entitled to vote at the meeting are the holders of Common Stock
of record at the close of business on May 7, 1998.
By Order of the Board of Directors
[LOGO]
Kapua A. Rice
Secretary
IMPORTANT
EVEN THOUGH YOU MAY EXPECT TO ATTEND THE ANNUAL MEETING, THE BOARD OF DIRECTORS
URGENTLY REQUESTS THAT, WHETHER YOUR COMMON STOCK SHAREHOLDINGS ARE LARGE OR
SMALL, YOU PROMPTLY FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN
THE POSTAGE-PAID ENVELOPE PROVIDED FOR THAT PURPOSE. YOUR VOTE IS VERY IMPORTANT
TO US. IF YOU DO ATTEND AND VOTE AT THE ANNUAL MEETING, YOUR VOTE IN PERSON WILL
SUPERSEDE ANY EARLIER VOTE BY PROXY.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION
300 Erie Boulevard West, Syracuse, New York 13202
The Board of Directors of Niagara Mohawk Power Corporation (the "Company" or
"Niagara Mohawk") has unanimously approved a Master Restructuring Agreement,
dated as of July 9, 1997, as amended (the "MRA"), pursuant to which the power
purchase agreements with certain independent power producers representing
approximately three quarters of the Company's over market power purchase
obligations will be terminated, restated or amended, all as described herein, in
exchange for approximately $3,631 million in cash and 42.9 million shares of
Common Stock. Pursuant to the rules of the New York Stock Exchange, the
Company's common shareholders must approve the issuance of such Common Stock,
and the Company is also seeking to amend its Certificate of Incorporation to
authorize additional shares of Common Stock. The Board of Directors believes
that the MRA, when coupled with the provisions of the PowerChoice Agreement
described herein, should arrest the Company's financial decline and provide
greater growth in shareholder value than the other alternatives available to the
Company.
The Board of Directors has also unanimously approved a proposal to adopt a
holding company structure, which would be implemented, following regulatory
approval, through a share exchange. If Niagara Mohawk common shareholders
approve the holding company proposal by adopting the Agreement and Plan of
Exchange at the Annual Meeting and the share exchange occurs, holders of shares
of Common Stock (including the independent power producers) will automatically
become holders of common stock of Niagara Mohawk Holdings, Inc. ("Holdings") on
the basis of one share of Niagara Mohawk for one share of Holdings common stock.
As a result of the share exchange,
- Holdings will become a holding company owned by the former common
shareholders of Niagara Mohawk;
- Holdings will become the sole owner of Niagara Mohawk's Common Stock;
- Niagara Mohawk's obligations with respect to its long-term debt, First
Mortgage Bonds and preferred stock will remain with Niagara Mohawk and not
be transferred to Holdings;
- Niagara Mohawk will continue to carry on its utility business as a
subsidiary of Holdings and Niagara Mohawk's non-utility subsidiaries
generally will become separate subsidiaries of Holdings.
We will also elect directors of Niagara Mohawk and act on shareholder
proposals relating to an endorsement by Niagara Mohawk of the CERES principles
and executive compensation at the Annual Meeting.
Your vote is very important. Please vote by completing and mailing the
enclosed proxy card to us. If you have any questions or need assistance in
voting your shares, please call D.F. King & Co., Inc., which is assisting in our
proxy solicitation, toll free at 1-800-848-3405.
This Prospectus/Proxy Statement provides you with detailed information about
the MRA and the proposed holding company structure and the share exchange. We
encourage you to read this entire document carefully, including "Certain
Considerations" under Proposals 2 and 4 at page 54 and at page 61.
Niagara Mohawk common shareholders will not need to physically exchange
their stock certificates for Holdings certificates when the share exchange
occurs. Existing certificates for Niagara Mohawk Common Stock will automatically
represent a like number of shares of Holdings common stock, which shares will be
listed on the New York Stock Exchange under the ticker symbol "NMK", and will no
longer represent Niagara Mohawk Common Stock when the share exchange occurs.
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT NIAGARA MOHAWK THAT IS NOT INCLUDED IN THIS DOCUMENT. THIS INFORMATION IS
AVAILABLE TO SECURITY HOLDERS WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST.
PLEASE DIRECT SUCH REQUESTS TO KAPUA A. RICE, SECRETARY, NIAGARA MOHAWK POWER
CORPORATION, 300 ERIE BOULEVARD WEST, SYRACUSE, NEW YORK 13202, TELEPHONE NUMBER
(315) 474-1511. TO OBTAIN TIMELY DELIVERY, SECURITY HOLDERS MUST REQUEST THIS
INFORMATION NO LATER THAN JUNE 16, 1998.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS/PROXY STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus/Proxy Statement dated May 19, 1998 and first mailed to
shareholders on or about May 19, 1998.
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TABLE OF CONTENTS
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QUESTIONS AND ANSWERS AND SUMMARY ABOUT THE MASTER RESTRUCTURING AGREEMENT AND THE HOLDING COMPANY
PROPOSAL AND SHARE EXCHANGE............................................................................. 1
INTRODUCTION.............................................................................................. 7
PROPOSAL 1: NOMINATION AND ELECTION OF DIRECTORS.......................................................... 9
PROPOSAL 2: APPROVAL OF ISSUANCE OF UP TO 42.9 MILLION SHARES OF COMMON STOCK TO CERTAIN INDEPENDENT POWER
PRODUCERS............................................................................................... 26
Background Information.................................................................................. 26
The MRA................................................................................................. 27
Board Recommendation.................................................................................... 29
The PowerChoice Agreement............................................................................... 35
Capitalization.......................................................................................... 37
Pro Forma Condensed Financial Statements................................................................ 38
Selected Historical and Pro Forma Financial Data........................................................ 49
Management's Discussion of Pro Forma Condensed Financial Statements..................................... 51
Certain Considerations.................................................................................. 54
Certain Litigation with Respect to the MRA.............................................................. 56
Conditions to the Consummation of the MRA............................................................... 57
Company Prospects If the MRA Is Not Consummated......................................................... 57
PROPOSAL 3: COMMON STOCK AMENDMENT........................................................................ 57
PROPOSAL 4: HOLDING COMPANY AND ADOPTION OF THE EXCHANGE AGREEMENT........................................ 59
Reasons for the Holding Company Structure and Share Exchange............................................ 59
Certain Considerations.................................................................................. 61
A. THE SHARE EXCHANGE................................................................................... 63
Exchange Agreement...................................................................................... 63
Regulatory Approvals.................................................................................... 63
Conditions to Effectiveness of the Share Exchange....................................................... 64
Exchange of Stock Certificates.......................................................................... 64
Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings....................................... 64
Dividend Reinvestment and Stock Purchase Plan........................................................... 65
Amendment or Termination of the Exchange Agreement...................................................... 65
Listing of Holdings Common Stock........................................................................ 65
Niagara Mohawk Common Stock Market Prices and Dividends................................................. 65
Dividend Policy......................................................................................... 66
Certain Federal Income Tax Consequences................................................................. 66
Niagara Mohawk Employee Plans........................................................................... 67
Treatment of Niagara Mohawk Preferred Stock............................................................. 68
Treatment of Niagara Mohawk Debt, Assets and Liabilities, and Business.................................. 69
Holdings Capital Stock.................................................................................. 69
Comparative Shareholders' Rights........................................................................ 73
Business................................................................................................ 75
Regulation of Holdings and Niagara Mohawk............................................................... 75
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The PowerChoice Agreement............................................................................... 76
Statutory Appraisal Rights.............................................................................. 76
B. MANAGEMENT........................................................................................... 77
Directors and Officers of Holdings...................................................................... 77
Restrictions on Board and Management Interlocks between Holdings and Niagara Mohawk..................... 77
C. OTHER INFORMATION.................................................................................... 78
Validity of Holdings Common Stock....................................................................... 78
Experts................................................................................................. 78
Costs................................................................................................... 78
PROPOSAL 5: SHAREHOLDER PROPOSAL RELATED TO THE CERES PRINCIPLES.......................................... 78
PROPOSAL 6: SHAREHOLDER PROPOSAL RELATED TO EXECUTIVE COMPENSATION........................................ 80
OTHER MATTERS............................................................................................. 81
Deadline for Shareholder Proposals...................................................................... 81
Additional Information.................................................................................. 81
Independent Accountants................................................................................. 82
Quarterly Reports....................................................................................... 82
WHERE YOU CAN FIND MORE INFORMATION....................................................................... 82
EXHIBIT A--AGREEMENT AND PLAN OF EXCHANGE................................................................. A-1
EXHIBIT B--CERTIFICATE OF INCORPORATION OF NIAGARA MOHAWK HOLDINGS, INC................................... B-1
EXHIBIT C-- BY-LAWS OF NIAGARA MOHAWK HOLDINGS, INC....................................................... C-1
EXHIBIT D-- OPINION OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION................................ D-1
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<PAGE>
QUESTIONS AND ANSWERS AND SUMMARY ABOUT THE
MASTER RESTRUCTURING AGREEMENT AND THE HOLDING COMPANY PROPOSAL
AND SHARE EXCHANGE
The following Questions and Answers and Summary highlight selected
information on Proposals 2, 3 and 4 at the Annual Meeting regarding the MRA and
the holding company proposal and share exchange, and may not contain all of the
information that is important to you. For a more complete discussion of such
matters, you should read carefully this entire document and the attached
exhibits and the documents referred to you. For example, the Agreement and Plan
of Exchange attached to this Prospectus/Proxy Statement as Exhibit A provides
for the share exchange, and Holdings' certificate of incorporation (Exhibit B)
and by-laws (Exhibit C) set out, among other things, provisions governing
certain rights of Holdings' shareholders. See also "Where You Can Find More
Information" on page 82 of this Prospectus/Proxy Statement.
1. WHAT IS THE MRA?
As a result of federal and New York law, the Company was required to
purchase electricity from independent power producers ("IPPs") in quantities
in excess of its own demand and at prices well in excess of those available
to the Company by internal generation or in the wholesale market. The MRA is
an agreement among the Company and 14 IPPs that sell electricity to the
Company under 27 power purchase agreements ("PPAs") which represent
approximately three quarters of the Company's overmarket purchase
obligations. Upon consummation of the MRA, the 27 PPAs will be terminated,
restated or amended.
2. WHAT WILL THE COMPANY PAY UNDER THE MRA?
Approximately $3,631 million in cash and 42.9 million shares of Niagara
Mohawk common stock. It is possible that prior to the closing of the MRA the
mix of consideration could be further revised. PPAs with respect to 1,100 MW
of electric capacity will be terminated entirely, and PPAs with respect to
541 MW of capacity will be restated on more favorable terms to Niagara
Mohawk than the existing contracts. Additionally, one PPA representing 42 MW
of capacity will be amended to reflect a shortened term (17 years) and a
lower stream of fixed unit prices.
3. WHAT ARE SHAREHOLDERS BEING ASKED TO APPROVE AND WHY?
The rules of the New York Stock Exchange require approval of the
issuance of a block of stock this large. In addition, the Company does not
have sufficient stock available under its Certificate of Incorporation to
issue 42.9 million shares. If the charter amendment is not approved (which
has a slightly higher vote requirement than the New York Stock Exchange
required vote), the Company would attempt to renegotiate the terms of the
MRA to lower the stock and increase the cash, or alternatively, would
purchase shares to use for the MRA.
4. WHY IS THE MRA GOOD FOR NIAGARA MOHAWK?
These above market power obligations have resulted in the deterioration
of the Company's competitive and financial position. Under the MRA, the
Company's significant long-term and escalating IPP payment obligations will
be restructured into a more manageable debt obligation and a smaller
portfolio of PPAs with more favorable price and duration terms, resulting in
a significant improvement in cash flow which can be dedicated to the
repayment of debt. In its written order issued March 20, 1998, the New York
State Public Service Commission (the "PSC"), which regulates utilities in
the State of New York, approved the PowerChoice Settlement Agreement (the
"PowerChoice Agreement") thereby establishing a five-year rate plan and
approving the terms of the MRA. The PowerChoice rate plan will allow the
Company to meet its financial obligations and provide for the recovery of
its stranded costs through a competitive transition charge ("CTC") in rates,
exit fees and back-up rates. The PowerChoice Agreement also allows the
Company to establish a regulatory asset reflecting most of the costs
associated with the MRA. The regulatory asset will be amortized generally
over ten years, and this amortization will substantially depress the
Company's reported earnings for at least five years.
1
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The Board of Directors has unanimously approved the MRA and recommends
that you vote "FOR" Proposals 2 and 3.
5. WHAT IS NIAGARA MOHAWK'S HOLDING COMPANY PROPOSAL? WHY IS IT BEING
PROPOSED?
Niagara Mohawk is proposing to establish a holding company structure
through a share exchange, with the new holding company being called Niagara
Mohawk Holdings, Inc. After the share exchange, Niagara Mohawk will continue
to operate its present utility business as a subsidiary of Holdings, and
certain of Niagara Mohawk's non-utility subsidiaries will become separate
subsidiaries of Holdings.
While Niagara Mohawk's financial condition and contractual obligations
will limit the amount of investments in unregulated businesses in the near
term, the Company believes this structure will give it the financial and
regulatory flexibility to compete more effectively in the increasingly
competitive energy industry by relaxing constraints imposed by the PSC on
incremental investments in unregulated operations. Relaxing constraints and
eliminating time-lags associated with regulatory decisions should allow more
rapid moves in an industry where competitors do not have the same
constraints as regulated entities. Niagara Mohawk also believes that a
holding company structure should provide greater opportunities for growth
and enhanced value, greater flexibility in developing new businesses, and
greater flexibility regarding the timing, method and amount of financings
and acquisitions, through the discernible separation between its utility and
non-utility businesses and relaxed constraints on unregulated activities.
Under the terms of the PowerChoice Agreement, Niagara Mohawk has a
one-year window in which it may adopt this structure. The Board of Directors
has unanimously approved the holding company proposal and the share exchange
and believes their adoption is in the best interests of Niagara Mohawk and
its shareholders. The Board recommends that you vote "FOR" that proposal and
adoption of the Agreement and Plan of Exchange at the Annual Meeting.
6. WHAT WILL THE HOLDING COMPANY STRUCTURE LOOK LIKE? WHAT TYPE OF
BUSINESSES WILL HOLDINGS
ENGAGE IN?
The chart below shows the present and proposed structures.
[LOGO]
2
<PAGE>
[LOGO]
In addition to becoming the parent holding company of Niagara Mohawk and
certain of its non-utility subsidiaries, Holdings will also be able to
invest in certain other businesses and ventures that should strengthen its
ability to provide total energy services in an increasingly competitive
marketplace.
Niagara Mohawk is engaged principally in the business of generation,
purchase, transmission, distribution and sale of electricity and the
purchase, distribution, sale and transportation of gas in New York State.
Its non-utility subsidiaries principally participate in energy-related
services and real estate development of property formerly owned by Niagara
Mohawk.
The principal executive offices of Niagara Mohawk are located at 300
Erie Boulevard West, Syracuse, New York 13202 and its telephone number is
(315) 474-1511. Holdings' principal executive offices are at the same
address; its telephone number is (315) 474-1511.
7. WHAT IS THE SHARE EXCHANGE?
The share exchange is the means by which the holding company structure
will be established. If shareholders approve the holding company proposal
and adopt the related Agreement and Plan of Exchange at the Annual Meeting,
the necessary regulatory approvals are received and Niagara Mohawk does not
abandon the holding company structure, Niagara Mohawk common shareholders
will automatically become holders of common stock of Holdings on the basis
of one share of Niagara Mohawk for one share of Holdings. Following the
exchange, Holdings will own all of Niagara Mohawk's outstanding common stock
and certain Niagara Mohawk's non-utility subsidiaries will become separate
subsidiaries of Holdings.
8. WILL I HAVE TO EXCHANGE MY NIAGARA MOHAWK STOCK CERTIFICATES FOR NEW
HOLDINGS CERTIFICATES?
No. Your present certificates for Niagara Mohawk Common Stock will
automatically represent an equal number of shares of Holdings common stock
when the exchange occurs and will no longer represent Niagara Mohawk Common
Stock.
9. WHEN WILL THE SHARE EXCHANGE OCCUR?
The exchange will occur once all the required regulatory approvals are
obtained. Assuming shareholder approval at the Annual Meeting, Niagara
Mohawk expects this to occur in the first quarter of 1999.
10. WHERE WILL MY HOLDINGS COMMON STOCK BE TRADED? WHAT WILL BE THE TICKER
SYMBOL?
Holdings common stock will be listed on the New York Stock Exchange, and
will trade under the ticker symbol "NMK".
Niagara Mohawk's Common Stock is presently listed and principally traded
on the New York Stock Exchange. The reported closing price of the Common
Stock on May 18, 1998 was $12 3/16. After the share exchange, Niagara
Mohawk's Common Stock will no longer trade and will be delisted.
3
<PAGE>
11. WHAT IS THE EFFECT ON DIVIDENDS?
Niagara Mohawk suspended the common stock dividend in 1996 to help
stabilize its financial condition. In making future dividend decisions with
respect to Niagara Mohawk or Holdings, the applicable board will evaluate,
along with standard business considerations, the entity's financial
condition, contractual and regulatory restrictions, the degree of
competitive pressure on prices, available cash flow, current and retained
earnings and other strategic considerations.
Following the share exchange, dividends on Niagara Mohawk preferred
stock will continue to be paid by Niagara Mohawk.
12. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES TO COMMON SHAREHOLDERS?
If a shareholder exchanges solely Niagara Mohawk Common Stock solely for
Holdings common stock, that shareholder will not recognize any gain or loss
under Federal income tax laws.
13. WILL NIAGARA MOHAWK PREFERRED STOCK OR BONDS BE EXCHANGED?
No. Niagara Mohawk's preferred stock will not be exchanged and will
continue as outstanding shares of Niagara Mohawk preferred stock. The rights
of holders of the preferred shares as provided in Niagara Mohawk's
certificate of incorporation will not change. Niagara Mohawk's First
Mortgage Bonds, as well as the unsecured notes to be issued in connection
with the financing of the MRA, will not change and will continue to be
obligations of Niagara Mohawk.
14. WHO WILL MANAGE THE HOLDING COMPANY?
A new Board of Directors of Holdings will be elected before the share
exchange by Niagara Mohawk as sole shareholder of Holdings. It will consist
of the then existing Niagara Mohawk directors. Certain existing officers of
Niagara Mohawk will also serve as officers of Holdings. William E. Davis
will be chairman and chief executive officer and a director of Holdings, and
will continue as chairman and chief executive officer and a director of
Niagara Mohawk.
The PowerChoice Agreement contains certain restrictions on Board and
managerial interlocks between Niagara Mohawk and Holdings and other
subsidiaries of Holdings.
15. HOW WILL MY PARTICIPATION IN THE DIVIDEND REINVESTMENT PLAN BE AFFECTED?
All shares of Niagara Mohawk Common Stock held under the Dividend
Reinvestment and Stock Purchase Plan will be automatically exchanged for
shares of Holdings common stock. We will continue the Dividend Reinvestment
and Stock Purchase Plan with Holdings common stock after the share exchange.
16. WHAT DO I NEED TO DO NOW?
Just mail your signed proxy card in the enclosed postage-paid return
envelope as soon as possible, so that your shares may be represented at the
Annual Meeting. The meeting will take place on Tuesday, June 23, 1998 at the
Buffalo Convention Center, Convention Center Plaza, Buffalo, New York.
17. WHAT SHAREHOLDER VOTE IS REQUIRED FOR APPROVAL OF THE HOLDING COMPANY
PROPOSAL AND THE SHARE
EXCHANGE?
Holders of record of Niagara Mohawk Common Stock on May 7, 1998 are
entitled to vote at the Annual Meeting. Two-thirds of the outstanding shares
of Niagara Mohawk Common Stock must be voted "For" Proposal 4 at the Annual
Meeting in order to approve the holding company proposal and the share
exchange.
4
<PAGE>
18. WHO CAN I CALL IF I HAVE ANY QUESTIONS?
We have set up a special number for you. You are welcome to call D.F.
King & Co., Inc., which is assisting in our proxy solicitation, toll free,
at 1-800-848-3405.
FOR NIAGARA MOHAWK EMPLOYEES AND RETIREES:
19. HOW WILL STOCK-BASED EMPLOYEE BENEFIT PLANS BE AFFECTED?
Niagara Mohawk's Employee Savings Fund Plans for Represented and
Non-Represented Employees and its 1992 Stock Option Plan will be amended to
provide for ownership of common shares of Holdings instead of Niagara Mohawk
Common Stock, and Holdings will take over responsibility for these plans.
All existing shares of Niagara Mohawk Common Stock held in these plans, or
subject to plan options or performance awards, will automatically become an
equal number of common shares or stock options or performance awards of
Holdings, and Holdings will be the issuer of future stock options and
awards.
20. WHAT WILL HAPPEN TO NIAGARA MOHAWK'S RETIREMENT AND OTHER EMPLOYEE
BENEFIT PLANS?
Holdings will take over responsibility for all Niagara Mohawk retirement
and employee benefit plans, such as our defined benefit pension plans,
health plans and disability plans. Benefits provided for in these plans will
not be changed as a result of our restructuring into a holding company.
SUMMARY OF OTHER SELECTED INFORMATION:
CERTAIN CONSIDERATIONS
Certain factors for your consideration in determining whether to vote "For"
Proposals 2 and 3 or the holding company proposal and to adopt the related
Agreement and Plan of Exchange are discussed under "Certain Considerations"
under Proposal 2 and "Certain Considerations" under Proposal 4.
REGULATORY APPROVALS
The PSC has approved the MRA and the holding company concept in the
PowerChoice Agreement. Niagara Mohawk plans to file shortly for certain
approvals and exemptions with respect to the holding company under the Federal
Power Act, the Atomic Energy Act and the Public Utility Holding Company Act of
1935, and has made additional filings with respect to the holding company with
the PSC.
CONDITIONS TO THE SHARE EXCHANGE
Completion of the share exchange depends on the satisfaction of certain
conditions, including; (a) common shareholder approval at the Annual Meeting;
(b) receipt of all necessary regulatory approvals; (c) Holdings' common shares
being listed on the New York Stock Exchange; and (d) a certificate of exchange
being filed with the New York Department of State.
AMENDMENT OR TERMINATION OF THE EXCHANGE AGREEMENT
The Niagara Mohawk and Holdings Boards of Directors may amend any of the
terms of the Agreement and Plan of Exchange at any time before or after its
adoption by common shareholders. No amendment, however, may materially and
adversely affect the rights of Niagara Mohawk's shareholders.
The Agreement may be terminated and the share exchange abandoned at any time
before or after shareholders adopt the Agreement if Niagara Mohawk's Board of
Directors determines that the completion of the share exchange would not be in
the best interests of Niagara Mohawk or its shareholders.
COMPARATIVE SHAREHOLDERS' RIGHTS
When the share exchange is completed, holders of Niagara Mohawk Common Stock
will automatically become holders of Holdings' common stock, and their rights
will be governed by Holdings' certificate of incorporation and by-laws instead
of those of Niagara Mohawk. Certain differences between the rights of holders of
Holdings common stock and those of holders of Niagara Mohawk Common Stock are
summarized on pages 73-75.
5
<PAGE>
Shares of Niagara Mohawk preferred stock will not be exchanged but will
continue as shares of Niagara Mohawk preferred stock. The share exchange will
not change the rights of holders of preferred stock as currently provided in
Niagara Mohawk's certificate of incorporation.
REGULATION OF HOLDINGS AND NIAGARA MOHAWK
Following the share exchange, Holdings, as the parent company of Niagara
Mohawk, will have to comply with the provisions of the PowerChoice Agreement.
Niagara Mohawk will continue to be regulated by the PSC as before. The PSC order
contains restrictions on transactions between Niagara Mohawk and Holdings and
other Holdings subsidiaries, loans, guarantees or pledges by Niagara Mohawk for
the benefit of Holdings or Holdings' subsidiaries, and on Board and managerial
interlocks.
Niagara Mohawk currently is exempt from the Federal Public Utility Holding
Company Act of 1935 by virtue of Section 3(a)(2) of such act which exempts
holding companies which are themselves state regulated utilities. When the share
exchange occurs, Holdings will become a "public utility holding company" and
will file an application with the Securities and Exchange Commission to exempt
it and each of its subsidiaries under Section 3(a)(1) from such act (except for
those provisions requiring approval of certain acquisitions and investments).
NEW RATE PLAN OF NIAGARA MOHAWK
The PowerChoice Agreement contains a new rate plan that will take effect
within 30 days of approval by the PSC of the new tariffs, and will remain in
effect for five years. The new tariffs will not take effect until after the
closing of the MRA. The rate plan will reduce average electricity prices for
residential and commercial customers by 3.2% over the first three years. This
reduction will include certain savings that will result from partial reductions
of the New York State Gross Receipts Tax. Industrial customers will receive
average price reductions of 25% relative to 1995 price levels; the calculation
of the level of these decreases includes discounts currently offered to some
industrial customers through optional and flexible rate programs. 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 weighted average
interest rate for the Senior Notes portion of the MRA Financing. In years four
and five of its rate plan, the Company can request an 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 in the MRA financial
contracts resulting from the indexing provisions of these contracts. Overall,
price increases in years four and five are limited to the rate of inflation. The
rate plan will continue to govern Niagara Mohawk's utility rates and charges
even if common shareholders do not approve the holding company proposal and
adopt the Agreement and Plan of Exchange at the Annual Meeting. In the event
that shareholders do not approve the holding company proposal, Niagara Mohawk
will not be able to realize any benefits from a holding company structure, which
the Company believes are important in the future deregulated competitive
environment of the energy industry.
STATUTORY APPRAISAL RIGHTS
Because of a recent change in New York law, holders of shares of Niagara
Mohawk Common Stock who do not vote for the holding company proposal and
adoption of the Agreement and Plan of Exchange will not have any right to
dissent and seek the fair value of their Common Stock in cash under New York
law.
6
<PAGE>
INTRODUCTION
SOLICITATION OF PROXIES
This Prospectus/Proxy Statement contains both a proxy statement furnished in
connection with the solicitation, by and on behalf of the Board of Directors of
Niagara Mohawk, of proxies to be voted at the Annual Meeting of Niagara Mohawk's
shareholders which will be held at the Buffalo Convention Center on Tuesday,
June 23, 1998 at 10:30 a.m. and at any adjournment or adjournments thereof, and
a prospectus of Holdings, relating to the issuance of up to 191,865,829 shares
of Holdings common stock upon the consummation of the holding company structure
for Niagara Mohawk described herein. This proxy statement and form of proxy are
first being mailed to holders on or about May 14, 1998. The mailing address of
the executive offices of Niagara Mohawk is 300 Erie Boulevard West, Syracuse,
New York 13202.
The enclosed form of Proxy is solicited by and on behalf of the Board of
Directors of Niagara Mohawk. Niagara Mohawk has employed D.F. King & Co., Inc.
to assist in the solicitation of proxies for a fee of $30,000 plus out-of-pocket
expenses which will be borne by Niagara Mohawk. Officers and employees of
Niagara Mohawk may solicit for no extra compensation. Solicitation is being made
by the use of the mails, but may also be made by telephone, telegram and
personal interviews. Niagara Mohawk will request brokers or other persons
holding stock in their names, or in the names of their nominees, to forward
proxy material to the beneficial owners of such stock or request authority for
the execution of the proxies and, upon request, will reimburse such brokers or
other persons for their reasonable out-of-pocket expenses in doing so.
VOTING RIGHTS AND VOTE REQUIRED
RECORD DATE
The close of business on May 7, 1998, has been fixed as the record date for
determining the holders of Common Stock entitled to vote at the meeting. Only
shareholders of Common Stock whose names appeared on the books of Niagara Mohawk
on the record date will be entitled to notice of and to vote at the meeting and
at any adjournment thereof. On the record date, there were 144,419,351 shares of
Common Stock outstanding and entitled to vote. Each share of Common Stock is
entitled to one vote.
Shareholders are urged to sign the accompanying form of proxy and return it
promptly in the envelope provided for that purpose. The proxy does not affect
the right to vote in person at the meeting. Proxies will be voted in accordance
with the shareholders' directions. If no directions are given, proxies will be
voted FOR the election of the nominees for directors set forth in this
Prospectus/Proxy Statement; FOR Proposals 2 and 3, which, respectively, approve
the issuance of Common Stock in connection with the MRA and increase the number
of authorized shares of Common Stock from 185 million shares to 250 million
shares; FOR Proposal 4, which will authorize the holding company structure and
the related share exchange; and against Proposals 5 and 6, the shareholder
proposals. In the event any nominee or director withdraws or is for any reason
unable to serve, a contingency not presently anticipated, proxies will be voted
for any nominee that may be designated by the Board of Directors as a substitute
nominee.
A majority of the shares entitled to vote at the meeting shall constitute a
quorum. A plurality of the votes cast at the meeting is required to elect
directors under Proposal 1. A majority of the votes cast is necessary to approve
Proposal 2 (issuance of shares to the IPPs), provided a majority of the
outstanding stock has cast a vote. A majority of the votes cast is necessary to
approve Proposals 5 and 6 (the shareholder proposals). A majority of the
outstanding Common Stock is necessary to approve Proposal 3 (the amendment of
the Corporation's Certificate of Incorporation). A vote of two-thirds of the
outstanding Common Stock is necessary to approve Proposal 4 (the holding company
proposal). Except where otherwise provided by law, an affirmative vote of a
majority of the votes cast at the meeting is required for approval of any other
matter. Abstentions and broker non-votes will not be considered as votes cast
with
7
<PAGE>
respect to a particular matter, but will be counted in the number of shares
present in person or represented by proxy for purposes of determining whether a
quorum is present. Proposals 2, 3, 4, 5 and 6 are considered "non-discretionary"
under the rules of the New York Stock Exchange and brokers who have received no
instructions from their clients do not have the authority to vote on the
proposals.
Full and fractional shares held by Niagara Mohawk for each participant in
the Dividend Reinvestment and Common Stock Purchase Plan will be voted by
Niagara Mohawk, as the registered owner of such shares, in accordance with the
participant's instructions on the Proxy.
Voting is confidential, in accordance with the provisions of Sections 8 and
9 of Article II of the by-laws of Niagara Mohawk (the "By-Laws"). Tabulation of
proxies and the votes cast at the meeting is conducted by an independent
inspector of election. Any information which would identify the vote of any
shareholder is held permanently confidential and will not be disclosed to
Niagara Mohawk, except in limited circumstances set forth in such Sections of
the By-Laws.
ADJOURNMENTS. It is Niagara Mohawk's present expectation that on the
scheduled date of the Annual Meeting, votes will be taken and the polls closed
on all Proposals. It is possible, however, that management may propose one or
more adjournments of the Annual Meeting, either to allow the inspectors of
election to count and report on the votes cast after the polls have been closed,
or, without closing the polls, in order to permit further solicitation of
proxies with respect to the Proposals or for other reasons. In order for any
such adjournment to be approved, the votes cast in favor thereof must represent
a majority of the total number of votes entitled to be cast by the holders of
the Common Stock present at the meeting in person or by proxy. Proxies solicited
by the Board of Directors will be voted at the Annual Meeting in favor of any
adjournment proposed by management but will not be considered a direction to
vote for any adjournment proposed by others. If any adjournment is properly
proposed at the Annual Meeting on behalf of any person other than management,
the persons named as proxies, acting in such capacity, will have discretion to
vote on such adjournment in accordance with their best judgment.
Attendance at the Annual Meeting will be limited to shareholders of record,
beneficial owners of Common Stock entitled to vote at the meeting having
evidence of ownership, the authorized representative (one only) of an absent
shareholder, and invited guests of the management. Any person claiming to be an
authorized representative of a shareholder must, upon request, produce written
evidence of the authorization. In order to assure a fair and orderly meeting and
to accommodate as many shareholders as possible who may wish to speak at the
meeting, management will permit only shareholders or their authorized
representatives to address the meeting and such persons may speak only once for
up to two minutes. In addition, management will require that any signs, banners,
placards and similar materials be left outside the meeting room.
REVOCATION OF PROXIES. A shareholder who has executed and returned a proxy
may revoke it at any time before it is voted by executing and returning a proxy
bearing a later date, by giving written notice of revocation to the Secretary of
Niagara Mohawk or by attending the Annual Meeting and voting in person.
NIAGARA MOHAWK'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL DIRECTOR
NOMINEES NAMED IN PROPOSAL 1.
NIAGARA MOHAWK'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MRA AND
RECOMMENDS A VOTE "FOR" THE ISSUANCE OF COMMON STOCK IN CONNECTION WITH THE MRA
AND TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK TO 250 MILLION
AS DISCUSSED IN PROPOSALS 2 AND 3.
IN ADDITION, THE BOARD HAS UNANIMOUSLY APPROVED THE HOLDING COMPANY
STRUCTURE AND ADOPTED THE EXCHANGE AGREEMENT AND RECOMMENDS A VOTE "FOR" THE
HOLDING COMPANY PROPOSAL AND THE ADOPTION OF THE EXCHANGE AGREEMENT AS DISCUSSED
IN PROPOSAL 4.
8
<PAGE>
FINALLY, NIAGARA MOHAWK'S BOARD RECOMMENDS A VOTE "AGAINST" THE SHAREHOLDER
PROPOSALS RELATING TO AN ENDORSEMENT BY THE COMPANY OF THE CERES PRINCIPLES AND
EXECUTIVE COMPENSATION, AS DISCUSSED IN PROPOSALS 5 AND 6.
- --------------------------------------------------------------------------------
PROPOSAL 1: NOMINATION AND ELECTION OF DIRECTORS
- --------------------------------------------------------------------------------
The Board of Directors currently consists of thirteen directors. Mr. Edmund
M. Davis will retire from the Board of Directors at the Annual Meeting after 28
years of service. The Board of Directors is deeply appreciative of the
contributions made by Mr. Davis. At the Annual Meeting, five directors will be
elected to Class I of the Board of Directors for three-year terms expiring at
the 2001 Annual Meeting or until their respective successors are duly elected
and qualified. As a result, the Company will have fourteen directors following
the 1998 Annual Meeting. Directors will be elected by a plurality of the votes
cast at the meeting.
Of the five nominees, Messrs. Budney and Panasci and Dr. Hill are members of
the present Board of Directors. Messrs. Alfiero and Johnson are being proposed
for election to the Board of Directors for the first time. Mr. Alfiero's
appointment is subject to regulatory approval. Section 305(b) of the Federal
Power Act, as amended by the Public Utility Regulatory Policies Act, restricts
the ability of a director of a public utility to simultaneously hold a position
as an officer or director of other specified corporations. Application seeking
approval from the Federal Energy Regulatory Commission ("FERC") will be filed by
Mr. Alfiero in the near future to concurrently hold the positions of Director of
Niagara Mohawk and Director of Marine Midland Bank; Phoenix Home Life Mutual
Insurance Company and Southwire Company.
In accordance with the Company's Certificate of Incorporation, the Board of
Directors is divided into three classes, composed of as nearly equal a number of
directors as is possible, with staggered terms of office so that one class of
the directors must be elected at each annual meeting. Because of the lateness of
the 1998 Annual Meeting, the By-laws were amended to provide that no person who
had reached 70 as of May 1 in the applicable year could stand for reelection.
Previously, persons who had reached 70 could not stand for reelection.
As applicable to each nominee and continuing director, the name, age as of
May 1, 1998, principal occupation, business experience for the last five years
or more, other directorships and the year in which first elected a director, are
set forth below.
BUSINESS BACKGROUND OF NOMINEES AND DIRECTORS
- --------------------------------------------------------------------------------
NOMINEES FOR CLASS I DIRECTORS--TERMS EXPIRING IN 2001
SALVATORE H. ALFIERO
- CHAIRMAN AND CHIEF EXECUTIVE OFFICER, MARK IV INDUSTRIES, INC.
- NOMINEE FOR ELECTION
Mr. Alfiero, age 60, Chairman and Chief Executive Officer, Mark IV
Industries, Inc., a manufacturer of engineered systems and components for power
transmission, fluid power and transfer, and filtration applications, located in
Amherst, NY. Mr. Alfiero founded Mark IV Industries, Inc. in 1969 and has been
Chairman and Chief Executive Officer since its inception. Director of Marine
Midland Bank; Phoenix Home Life Mutual Insurance Company; and Southwire Company.
9
<PAGE>
ALBERT J. BUDNEY, JR.
- PRESIDENT OF THE COMPANY
- DIRECTOR SINCE 1995
Mr. Budney, age 50, was elected President of the Company in 1995. Mr. Budney
was previously employed by UtiliCorp United, Inc., an energy services company,
as Managing Vice President of the UtiliCorp Power Services Group and as
President of the Missouri Public Service Division. Mr. Budney joined UtiliCorp
United, Inc. in 1993. Prior to that, he was Vice President of Stone & Webster
Engineering Corp., where he managed the engineering firm's Boston Business
Development Department. Director of Plum Street Enterprises, Inc. ("Plum
Street"); Canadian Niagara Power Company, Limited ("CNP"); and Utilities Mutual
Insurance Company. President of Opinac North America, Inc. ("Opinac NA"), a
wholly-owned subsidiary of the Corporation. Opinac NA holds 100% of Plum Street
and, through its subsidiary, Opinac Energy Corporation ("Opinac"), a 50 percent
interest in CNP.
DR. BONNIE GUITON HILL
- PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE TIMES MIRROR FOUNDATION AND
VICE PRESIDENT OF THE TIMES MIRROR COMPANY
- DIRECTOR SINCE 1991
- MEMBER OF AUDIT, CORPORATE PUBLIC POLICY & ENVIRONMENTAL AFFAIRS AND
FINANCE COMMITTEES OF THE BOARD
Dr. Hill, age 56, President and Chief Executive Officer of The Times Mirror
Foundation, a non-profit institution, and Vice President of The Times Mirror
Company, a news and information company, located in Los Angeles, CA. Dr. Hill
served as Dean and Professor of Commerce of the McIntire School of Commerce at
the University of Virginia from 1992-1996. Prior to that, she served as the
Secretary of State and Consumer Services Agency for the State of California.
Director of AK Steel Corporation; Crestar Financial Corporation; Hershey Foods
Corporation; and Louisiana-Pacific Corporation.
CLARK A. JOHNSON
- CHAIRMAN AND CHIEF EXECUTIVE OFFICER, PIER 1 IMPORTS INC.
- NOMINEE FOR ELECTION
Mr. Johnson, age 67, Chairman and Chief Executive Officer, Pier 1 Imports
Inc., a specialty retailer of imported home furnishings, gifts and related
items, located in Fort Worth, TX. From May 1985 to March 1988, Mr. Johnson
served as President and Chief Executive Officer of Pier 1 Imports Inc. and has
been Chairman and Chief Executive Officer since 1988. Director of Pier 1 Imports
Inc., Albertson's Inc., InterTAN Inc., Metro Media International Group and Land
Care Inc.
HENRY A. PANASCI, JR.
- CHAIRMAN, CYGNUS MANAGEMENT GROUP, LLC
- DIRECTOR SINCE 1988
- MEMBER OF COMPENSATION & SUCCESSION, CORPORATE PUBLIC POLICY AND
ENVIRONMENTAL AFFAIRS AND FINANCE COMMITTEES OF THE BOARD
Mr. Panasci, age 69, Chairman of Cygnus Management Group, LLC, a consulting
firm specializing in venture capital and private investments located in
Syracuse, NY. Mr. Panasci retired in 1996 as Chairman
10
<PAGE>
of the Board and Chief Executive Officer of Fay's Incorporated, a drug store
chain. Mr. Panasci co-founded Fay's Drug Co., Inc. with his father in 1958.
Director of National Association of Chain Drug Stores.
------------------------
CONTINUING CLASS II DIRECTORS--TERMS EXPIRING IN 1999
WILLIAM F. ALLYN
- PRESIDENT AND CHIEF EXECUTIVE OFFICER OF WELCH ALLYN, INC.
- DIRECTOR SINCE 1988
- MEMBER OF AUDIT, COMPENSATION & SUCCESSION, AND NUCLEAR OVERSIGHT
COMMITTEES OF THE BOARD
Mr. Allyn, age 62, President and Chief Executive Officer of Welch Allyn,
Inc., Skaneateles Falls, NY, a manufacturer of medical diagnostic
instrumentation, bar code readers and optical scanning devices. Mr. Allyn joined
Welch Allyn, Inc. in 1962 and was elected to his present position in 1980.
Director of First Empire State Corporation; Oneida Limited; and Perfex
Corporation.
WILLIAM E. DAVIS
- CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER OF THE COMPANY
- DIRECTOR SINCE 1992
- CHAIRPERSON OF EXECUTIVE COMMITTEE OF THE BOARD
Mr. Davis, age 56, was elected Chairman of the Board and Chief Executive
Officer of the Company in 1993. Mr. Davis joined the Company in 1990 and was
elected Senior Vice President in April 1992, serving in that capacity until
elected Vice-Chairman of the Board of the Corporation in November 1992. Director
of Opinac NA; Plum Street; Opinac; CNP; and Utilities Mutual Insurance Company.
Mr. Davis is also the Chairman of the Board of Plum Street and holds the
position of Secretary, Utilities Mutual Insurance Company.
WILLIAM J. DONLON
- FORMER CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER OF THE COMPANY
- DIRECTOR SINCE 1980
Mr. Donlon, age 68, retired in 1993 as Chairman of the Board and Chief
Executive Officer of the Company with 45 years service as an active employee.
Director of Opinac; and Directors' Advisory Council--Syracuse Division for M&T
Bank.
ANTHONY H. GIOIA
- CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF GIOIA MANAGEMENT, INC.
- DIRECTOR SINCE 1996
- MEMBER OF EXECUTIVE, COMPENSATION & SUCCESSION AND NUCLEAR OVERSIGHT
COMMITTEES OF THE BOARD
Mr. Gioia, age 56, Chairman and Chief Executive Officer of Gioia Management,
Inc., a holding company for several companies, including three packaging
companies located in Buffalo and Lockport, NY. Mr. Gioia has held his present
position since 1987.
DR. PATTI MCGILL PETERSON
- EXECUTIVE DIRECTOR OF THE COUNCIL FOR INTERNATIONAL EXCHANGE OF SCHOLARS
AND VICE PRESIDENT OF THE INSTITUTE FOR INTERNATIONAL EDUCATION
- DIRECTOR SINCE 1988
11
<PAGE>
- MEMBER OF EXECUTIVE, AUDIT (CHAIRPERSON) AND CORPORATE PUBLIC POLICY &
ENVIRONMENTAL AFFAIRS COMMITTEES OF THE BOARD
Dr. Peterson, age 54, Executive Director of the Council for International
Exchange of Scholars and Vice President of the Institute for International
Education, affiliated non-profit institutions headquartered in Washington, DC
and New York, NY, respectively. From 1996 to 1997, Dr. Peterson was a Senior
Fellow of the Cornell Institute for Public Affairs, Cornell University, Ithaca,
NY. Dr. Peterson also served as President of St. Lawrence University from
1987-1996. Prior to that, she was President of Wells College. She holds the
title President Emerita at both institutions. Independent Trustee of John
Hancock Mutual Funds.
CONTINUING CLASS III DIRECTORS--TERMS EXPIRING IN 2000
LAWRENCE BURKHARDT, III
- NUCLEAR CONSULTANT
- DIRECTOR SINCE 1988
- CHAIRPERSON OF NUCLEAR OVERSIGHT COMMITTEE OF THE BOARD
Mr. Burkhardt, age 65, independent consultant to the nuclear industry since
1990. Prior to his retirement in 1990, Mr. Burkhardt was employed by the Company
and served as Executive Vice President of Nuclear Operations. Director of
MACTEC, Inc., formerly Management Analysis Company.
DOUGLAS M. COSTLE
- DISTINGUISHED SENIOR FELLOW AND CHAIRMAN OF THE BOARD OF THE INSTITUTE FOR
SUSTAINABLE COMMUNITIES
- DIRECTOR SINCE 1991
- MEMBER OF EXECUTIVE, AUDIT, CORPORATE PUBLIC POLICY & ENVIRONMENTAL
AFFAIRS (CHAIRPERSON), AND NUCLEAR OVERSIGHT COMMITTEES OF THE BOARD
Mr. Costle, age 58, Distinguished Senior Fellow and Chairman of the Board of
the Institute for Sustainable Communities, a non-profit organization located in
Montpelier, VT. Mr. Costle has held his present position since 1991. Former Dean
of the Vermont Law School in South Royalton, Vermont, and Administrator of the
U.S. Environmental Protection Agency. Independent Trustee of John Hancock Mutual
Funds.
DONALD B. RIEFLER
- FINANCIAL MARKET CONSULTANT
- DIRECTOR SINCE 1978
- MEMBER OF EXECUTIVE, AUDIT, FINANCE (CHAIRPERSON), AND NUCLEAR OVERSIGHT
COMMITTEES OF THE BOARD
Mr. Riefler, age 70, financial market consultant and advisor to J. P.
Morgan, Florida FSB, Palm Beach, FL, a private banking concern affiliated with
J. P. Morgan & Co., Inc. Prior to his retirement in 1991, Mr. Riefler was
Chairman of the Market Risk Committee for J. P. Morgan & Co. Inc. and Morgan
Guaranty Trust Company of New York.
STEPHEN B. SCHWARTZ
- RETIRED SENIOR VICE PRESIDENT, INTERNATIONAL BUSINESS MACHINES CORPORATION
- DIRECTOR SINCE 1992
- MEMBER OF EXECUTIVE, COMPENSATION & SUCCESSION (CHAIRPERSON) AND FINANCE
COMMITTEES OF THE BOARD
Mr. Schwartz, age 63, retired as Senior Vice President of International
Business Machines Corporation in 1992. Mr. Schwartz joined IBM in 1957 and was
elected Senior Vice President in 1990. Director of MFRI, Inc.
12
<PAGE>
BOARD OF DIRECTORS AND COMMITTEES
- --------------------------------------------------------------------------------
MEETINGS AND ATTENDANCE
During 1997, 14 meetings of the Company's Board of Directors were held. Each
director, except for Mr. Edmund M. Davis, attended more than 75 percent of the
combined total of meetings of the Board of Directors and the committees on which
he or she served.
There are six standing committees of the Board: the Executive Committee, the
Audit Committee, the Compensation and Succession Committee, the Committee on
Corporate Public Policy and Environmental Affairs, the Finance Committee and the
Nuclear Oversight Committee. The Board does not have a standing Nominating
Committee to nominate candidates for Board membership, but functions as a
committee of the whole. Any nomination may be made from the floor by any
shareholder who has made a written request to the Company to have such
nomination considered at the annual meeting in accordance with the requirements
of the Company's By-Laws. Information with respect to the Audit Committee and
the Compensation and Succession Committee is set forth below.
AUDIT COMMITTEE
The Audit Committee, consisting of Patti McGill Peterson, Chairperson,
William F. Allyn, Douglas M. Costle, Bonnie Guiton Hill and Donald B. Riefler,
all of whom are non-employee directors, met 10 times in 1997. Duties performed
by the Audit Committee include meeting with the independent accountants, chief
internal auditors and certain personnel of the Company to discuss the planned
scope of auditing examinations and the adequacy of internal controls and interim
and annual financial reporting; reviewing the results of the annual examination
of the consolidated financial statements and periodic internal audit
examinations; reviewing the services and fees of the Company's independent
accountants; overseeing matters involving compliance with corporate business
ethics policies; reviewing management's assessment of financial risks;
authorizing and participating in special projects and studies; and performing
any other duties or functions deemed appropriate by the Board.
COMPENSATION AND SUCCESSION COMMITTEE
The Compensation and Succession Committee, consisting of Stephen B.
Schwartz, Chairperson, William F. Allyn, Edmund M. Davis, Anthony H. Gioia and
Henry A. Panasci, Jr., all of whom are non-employee directors, met eight times
during 1997. The Committee evaluates the performance of the Corporation's Chief
Executive Officer and the other senior officers of the Company; reviews the
annual and incentive compensation of the elected officers of the Company, the
Company's compensation programs and benefit plans, and officer development and
succession plans; makes recommendations to the Board of Directors with respect
to these matters; and meets with the Company's actuarial advisors to review the
advisor's annual reports and progress toward funding the pension,
post-retirement health plans, and supplemental executive retirement plan.
COMPENSATION AND SUCCESSION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
- --------------------------------------------------------------------------------
Directors Allyn, Edmund Davis, Gioia, Panasci and Schwartz, all of whom are
non-employee directors, are the members of the Compensation and Succession
Committee.
No person serving during 1997 as a member of the Compensation and Succession
Committee of the Board served as an officer or employee of the Company or any of
its subsidiaries during or prior to 1997.
No person serving during 1997 as an executive officer of the Company serves
or has served as a director or a member of the compensation committee of any
other entity that has an executive officer who serves or has served either as a
member of the Compensation and Succession Committee or as a member of the Board
of Directors of the Company.
13
<PAGE>
- --------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table shows the persons (as the term is used in Section
13(d)(3) of the Securities Exchange Act of 1934) known to the Corporation to own
more than five percent (5%) of the Company's Common Stock as of December 31,
1997.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF
TITLE OF CLASS OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ ------------------------------------ -------------------- -----------------
<S> <C> <C> <C>
Common Stock........................ FMR Corp. 14,441,831(1) 10.00%
82 Devonshire Street
Boston, Massachusetts 02109
Common Stock........................ Fidelity Management Trust Co. 11,829,786(2) 8.19%
82 Devonshire Street,
Boston, Massachusetts 02109
Common Stock........................ The Prudential Insurance 8,404,245(3) 5.82%
Company of America
751 Broad Street
Newark, New Jersey 07102-3777
</TABLE>
- ------------------------
(1) Includes 1,873,631 shares with respect to which FMR Corp. has sole voting
power and 14,441,831 with sole power to dispose or to direct disposition as
reported on Schedule 13G, dated February 14, 1998, filed with SEC.
(2) The above represents shares in the Company's Non-Represented and Represented
Employees' Savings Fund Plans. Fidelity Management Trust Company serves as
Trustee. The Trustee will vote all shares of Common Stock held in the Trusts
established for the Plans in accordance with the directions received from
the employees participating in the Plans. The Trustee will vote shares for
which it receives no instructions in the same proportion as it votes shares
for which it receives instructions.
(3) Includes 789,900 shares with respect to which Prudential Insurance Company
of America has sole voting power; 7,575,445 shares with shared power to
vote; 789,900 shares with sole power to dispose or to direct disposition and
7,614,345 shares with shared power to dispose, as reported on Schedule 13G,
dated February 10, 1998, filed with the SEC.
The Company believes that holders of approximately 88.2% of the Company's
Common Stock outstanding as of December 31, 1997 elected to hold their shares,
not in their own names, but in the names of banking or financial intermediaries.
Accordingly, as of that date, 127,431,405 shares were registered in the nominee
name of The Depository Trust Company, Cede & Co.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table reflects shares of the Company's Common Stock
beneficially owned (or deemed to be beneficially owned pursuant to the rules of
the Securities and Exchange Commission) as of April 7, 1998 by each director of
the Company, each of the executive officers named in the Summary Compensation
Table below and the current directors and executive officers of the Company as a
group. The table also lists the number of stock units credited to directors,
named executive officers and the directors and executive officers of the Company
as a group as of April 7, 1998, pursuant to the Company's compensation and
benefit programs. No voting rights are associated with stock units.
14
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
AMOUNT AND NATURE OF
TITLE OF NAME AND ADDRESS OF BENEFICIAL PERCENT STOCK UNITS
CLASS BENEFICIAL OWNER OWNERSHIP* OF CLASS HELD***
- ----------------- ------------------------------------------------ -------------------- ------------- -----------
<S> <C> <C> <C> <C>
Common Stock DIRECTORS:
Salvatore H. Alfiero............................ 5,000(1) ** 0
------- -----------
William F. Allyn................................ 1,000 ** 9,158(9)
Albert J. Budney, Jr............................ 10,500(2) ** 72,500(10)
Lawrence Burkhardt, III......................... 452 ** 2,773(9)
Douglas M. Costle............................... 500 ** 9,551(9)
Edmund M. Davis................................. 2,274 ** 26,386(9)
William E. Davis................................ 45,238(3) ** 115,000(10)
William J. Donlon............................... 15,343(4) ** 0
Anthony H. Gioia................................ 500 ** 2,311(9)
Bonnie Guiton Hill.............................. 1,000 ** 8,077(9)
Clark A. Johnson................................ 0 0
Henry A. Panasci, Jr............................ 2,500 ** 2,311(9)
Patti McGill Peterson........................... 500 ** 11,199(9)
Donald B. Riefler............................... 1,000 ** 25,877(9)
Stephen B. Schwartz............................. 500 ** 11,204(9)
NAMED EXECUTIVES:
B. Ralph Sylvia................................. 22,787(5) ** 36,450(10)
John W. Powers.................................. 26,659(6) ** 18,250(10)
Darlene D. Kerr................................. 15,726(7) ** 29,350(10)
All Directors and Executive Officers (23) as a
group......................................... 202,260(8) ** 484,797
</TABLE>
- ------------------------
* Based on information furnished to the Company by the Directors and Executive
Officers. Includes shares of Common Stock credited under the Employees'
Savings Fund Plan as of March 10, 1998.
** Less than one percent.
*** Stock units under the SIP were paid following the filing of this chart in
the Company's Annual Report on Form 10-K for the year ended December 31,
1997, and thus this chart reflects the lower amounts.
(1) Shares of Common Stock beneficially owned as of May 18, 1998.
(2) Includes options for 10,000 shares of Common Stock exercisable within 60
days.
(3) Includes presently exercisable options for 42,625 shares of Common Stock.
(4) Includes presently exercisable options for 13,333 shares of Common Stock.
(5) Includes presently exercisable options for 18,000 shares of Common Stock.
(6) Includes presently exercisable options for 12,000 shares of Common Stock.
(7) Includes presently exercisable options for 9,000 shares of Common Stock.
(8) Includes presently exercisable options for 141,083 shares of Common Stock.
(9) Represents deferred stock units granted pursuant to the Outside Director
Deferred Stock Unit Plan. No voting rights are associated with deferred
stock units. For additional information regarding deferred stock units,
refer to pages 24-25 ("Compensation of Directors").
(10) Represents stock units granted in 1996, 1997 and 1998 pursuant to the
Long-Term Incentive Plan. No voting rights are associated with stock units.
For additional information regarding stock units granted to named
executives, refer to pages 17-18 ("Long-Term Incentive Plan").
In addition to the shares of the Company's Common Stock, Albert J. Budney,
Jr. indirectly owns 100 shares of the Company's Preferred Stock, 9 1/2% Series.
15
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors, executive officers, beneficial owners of more than 10
percent of any class of equity securities and any other person subject to
Section 16 ("reporting persons") to file initial reports of ownership and
reports of changes in ownership of the Company's equity securities with the
Securities and Exchange Commission and the New York Stock Exchange. Based solely
on a review of the copies of such forms and written representations from the
Company's directors and executive officers, the Company believes that during the
preceding year the reporting persons have complied with all Section 16(a) filing
requirements. After the effective time of the share exchange, Holdings'
directors and officers, and persons who own more than 10 percent of a registered
class of Holdings' equity securities, will become subject to these provisions.
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS' COMPENSATION AND SUCCESSION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
- --------------------------------------------------------------------------------
The Compensation and Succession Committee of the Board of Directors (the
"Committee") is composed entirely of non-employee directors. The Committee has
responsibility for recommending officer salaries and for the administration of
the Corporation's officer incentive compensation plans as described in this
report. The Committee makes recommendations to the Board of Directors which
makes final officer compensation determinations.
This Committee report describes the Company's executive officer compensation
policies, the components of the compensation program, and the manner in which
1997 compensation determinations were made for the Corporation's Chairman of the
Board and Chief Executive Officer, Mr. William E. Davis.
The 1997 Executive Officer Compensation Program was composed entirely of
base salary, frozen at 1995 levels, and 1997 grants of stock units and stock
appreciation rights ("SARs") made pursuant to the Long-Term Incentive Plan
("LTIP") adopted by the Board of Directors on September 25, 1996, as described
later in this report.
BASE SALARY
The Committee seeks to ensure that salaries of the Company's officers,
including executive officers, remain competitive with levels paid to comparable
positions among other U.S. electric and gas utilities with comparable revenues
(collectively referred to as the "Comparator Utilities"). The Committee believes
that competitive salaries provide the foundation of the Company's officer
compensation program and are essential for the Company to attract and retain
qualified officers, especially in light of the increasing competition within the
industry. Each officer position has been assigned to a competitive salary range.
The Committee intends to administer salaries within the 25th to 75th percentiles
of practice with respect to those Comparator Utilities. The 1997 average salary
of the five named executive officers falls below 25th percentile competitive
levels. Since executive officer salaries were frozen at 1995 levels, as a
condition for receipt of 1995 stock incentive grants, the competitiveness of
annual executive officer compensation is heavily dependent on stock-related
incentives in the form of stock units and stock appreciation rights granted
under the 1995 Stock Incentive Plan ("SIP") and the LTIP.
1995 STOCK INCENTIVE PLAN
On December 14, 1995, the Board of Directors approved the SIP to promote the
success and enhance the value of the Company through the retention and continued
motivation of the Company's officers and to focus their efforts toward the
execution of business strategies directed toward improving financial returns to
shareholders. Awards under the SIP consisted of stock units and SARs. These
stock unit grants were paid in cash in April 1998 based on the fair market value
of the Company's Common Stock during the last 12 consecutive trading days in
1997 ($9.922). Under the SIP, dividends are credited (in an amount equivalent to
dividends paid, if any, on the Company's Common Stock) with respect to all stock
units granted. These credits are reinvested at the prevailing stock price,
thereby increasing the number of stock
16
<PAGE>
units payable at the end of the period. No dividends were credited to SIP stock
units. The SARs became exercisable on January 2, 1998, and may be exercised
until they expire on December 31, 2002.
The SIP was structured so that any compensation earned by officers during
the two-year period 1996 and 1997, other than base salary, will be based on the
Company's year-end 1997 stock price and total returns realized by shareholders
during this period. Accordingly, participants (including the executive officers
listed in the Summary Compensation Table) did not receive any salary increases
(except to reflect promotions), annual incentive compensation or stock option
grants during 1996 and 1997. Generally speaking, SIP grants were structured so
that the Company's stock price would have to more than double during this
two-year period in order for the total compensation of the participants to
approximate median competitive levels.
The Committee does not intend to make further SIP grants other than the 1995
stock unit grants which became payable in early 1998 and the 1995 stock
appreciation rights grants which became exercisable on January 2, 1998 and
expire on December 31, 2002. Long-term incentive grants were made in 1996, 1997,
and 1998 under the LTIP described below.
LONG-TERM INCENTIVE PLAN
Because the Committee seeks to provide a continuous program of long-term
stock incentives, on September 25, 1996 the Board of Directors adopted the LTIP
and approved stock unit and SAR grants for the 1996-1998 period. These stock
unit grants will be paid in cash in early 1999. Dividends are credited (in an
amount equivalent to dividends paid, if any, on the Company's common stock) with
respect to the 1996-1998 stock unit grants, which are reinvested at the
prevailing stock price, thereby increasing the number of stock units payable in
early 1999. The payment value of the stock units will be based on the average
fair market value of the Company's common stock during the last 12 consecutive
trading days in 1998. The 1996 LTIP SAR grants first become exercisable on
January 2, 1999, and may be exercised until they expire on December 31, 2005.
On January 29, 1997, the Board of Directors approved the grant of LTIP stock
units and SARs for the 1997-1999 performance period. These stock units, and
accumulated dividend stock units, will be paid in early 2000 based on the
average fair market value of the Company's common stock during the last twelve
consecutive trading days in 1999. The SARs first become exercisable on January
2, 2000, and can be exercised until they expire on December 31, 2006.
The size of both the 1996-1998 and 1997-1999 LTIP stock unit and SAR grants
were determined, based on the price of the Company's common stock at the time
these grants were made, so that the combination of the officers' current
salaries plus the grant date present value of SIP, and LTIP grants for the
1996-1998 and 1997-1999 performance periods, would approximate the 50th
percentile of comparator utility total compensation practice for the three-year
period 1995 through 1997. The competitiveness of the actual compensation
realized from SIP and the 1996-1998 and 1997-1999 LTIP grants is dependent on
the market value of the Company's common stock at the end of 1997, 1998, and
1999.
The Board of Directors also approved a January 19, 1998 grant of LTIP stock
units and SARs for the period 1998-2000. These stock units, and any accumulated
dividend stock units, will be paid in early 2001 based on the average fair
market value of the Company's Common Stock during the last 12 consecutive
trading days in 2000. The SARs will first become exercisable on January 2, 2001,
and can be exercised until they expire on December 31, 2007. The 1998 stock unit
and SAR grants were determined so that the average current salary and the
average grant date present value of the 1998 LTIP grants for the five named
executive officers would approximate the 50th percentile of 1997 Comparator
Utility total compensation practice.
17
<PAGE>
Through the combination of base salary, and during 1996, 1997 and 1998,
stock unit and SAR grants, the Committee seeks to focus the efforts of officers
toward improving, annually and over the longer-term, the financial returns for
its shareholders.
COMPENSATION OF WILLIAM E. DAVIS, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER
Mr. Davis became Chief Executive Officer on May 1, 1993. In April 1996, Mr.
Davis voluntarily reduced his annual salary from a level of $490,000 to the
current level of $450,500. The Committee has been advised by its consultant that
Mr. Davis' 1997 salary falls below the 25th percentile relative to the chief
executive officers of the Comparator Utilities. On December 13, 1995, the Board
granted Mr. Davis 25,000 stock units and 142,500 SARs, with an exercise price of
$10.75, under the SIP. As set forth above, SIP stock unit grants were paid to
Mr. Davis and the other named executive officers in April 1998. Mr. Davis' SIP
stock unit and SAR grants were intended to provide competitive total
compensation opportunities during the 1996 and 1997 period, depending on the
Company's stock price, considering that his salary would not be increased and
that he would receive no annual incentive compensation payments and no stock
options during this two-year period.
As previously indicated, the Committee and the Board of Directors seek to
provide a continuous program of long-term stock incentives beyond 1997 when SIP
stock unit grants became payable and SIP SAR grants became exercisable.
Accordingly, on September 25, 1996 the Board of Directors approved a grant of
45,000 stock units and 90,000 SARs, with an exercise price of $8.00, for Mr.
Davis for the 1996-1998 performance period. On January 29, 1997 the Board of
Directors approved a grant of 35,000 stock units and 70,000 SARs, with an
exercise price of $10.30, for the 1997-1999 performance period. Both the
1996-1998 and 1997-1999 grants were made under the terms of the LTIP. The size
of the 1996-1998 and 1997-1999 LTIP grants for Mr. Davis was determined so that
the grant date present value of both grants, in combination with his current
salary and his SIP grants, would approximate the 50th percentile for comparator
utility chief executive officers during the 1995-1997 period. The
competitiveness of the compensation Mr. Davis actually realizes from the SIP and
LTIP grants is dependent on the market value of the Corporation's common stock
at the end of 1997, 1998, and 1999.
As previously indicated, the Board of Directors approved a January 19, 1998
grant of LTIP stock units and SARs for Mr. Davis for the period 1998-2000. The
size of these grants was determined so that the sum of his current salary plus
the grant date present value of the 1998 stock unit and SAR grants would fall
approximately midway between the 25th and 50th percentiles of 1997 total
compensation practice for electric/gas utilities of comparable size.
------------------------
The Committee is aware of the limitations that tax legislation has placed on
the tax deductibility of compensation in excess of $1 million which is paid in
any year to an executive officer. Currently none of the executive officers has
received compensation subject to such limitations. The Committee will continue
to monitor developments in this area and take appropriate actions to preserve
the tax deductibility of compensation paid to executive officers, should this
become necessary.
SUBMITTED BY THE COMPENSATION AND SUCCESSION COMMITTEE OF THE BOARD OF
DIRECTORS:
Stephen B. Schwartz, Chairperson
William F. Allyn
Edmund M. Davis
Anthony H. Gioia
Henry A. Panasci, Jr.
18
<PAGE>
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The table below sets forth all compensation paid by the Company and its
wholly-owned subsidiaries for services rendered in all capacities during the
fiscal years ended December 31, 1997, December 31, 1996 and December 31, 1995,
to the Chairman of the Board and Chief Executive Officer and to each of the
other four most highly compensated executive officers of the Company for the
fiscal year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
FISCAL YEARS 1997, 1996 AND 1995
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
AWARDS
ANNUAL COMPENSATION RESTRICTED
----------------------------------- OTHER ANNUAL STOCK
NAME POSITION YEAR SALARY ($)(A) BONUS($) COMPENSATION($)(C) AWARDS ($)(D)
- ------------------ ------------------ --------- ------------- --------- --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
W. E. Davis Chairman of the 1997 450,501 0 110 371,875
Board and Chief 1996 462,351 0 0 360,000
Executive Officer 1995 473,542 0 0 246,875
A. J. Budney, Jr. President and 1997 315,002 0 110 185,938
Chief Operating 1996 315,002 0 2,956 180,000
Officer 1995 236,251 50,000(B ) 32,727 148,125
B. R. Sylvia Executive Vice 1997 295,001 0 110 117,938
President 1996 295,001 0 0 114,000
1995 295,001 0 0 98,750
J. W. Powers Senior Vice 1997 210,190 0 110 85,000
President 1996 211,002 0 0 142,000
1995 209,251 0 0 0
D. D. Kerr Senior Vice 1997 210,001 0 110 85,000
President 1996 210,001 0 0 82,000
1995 191,085 0 0 74,063
<CAPTION>
SECURITIES
UNDERLYING ALL OTHER
NAME OPTIONS/SARS(#) COMPENSATION(E)
- ------------------ ----------------- -----------------
<S> <C> <C>
W. E. Davis 70,000 42,358
90,000 43,365
152,500 35,729
A. J. Budney, Jr. 35,000 16,436
45,000 24,975
76,000 48,541
B. R. Sylvia 22,200 11,153
28,500 10,174
49,000 24,832
J. W. Powers 16,000 187,878
30,000 30,541
22,000 58,466
D. D. Kerr 16,000 7,953
20,500 9,415
31,500 7,338
</TABLE>
- ------------------------
(A) Includes all employee contributions to the Employees' Savings Fund Plan.
(B) 1995 bonus for Mr. Budney represents a bonus for 1995 guaranteed at the time
he was hired if earnings per share thresholds were not met under the Officer
Incentive Compensation Plan (an annual incentive compensation plan adopted
by the Board of Directors on December 13, 1990, and suspended for 1996 and
1997 as a condition of participation in the SIP).
(C) 1996 and 1995 Other Annual Compensation for Mr. Budney represents amounts
reimbursed for payment of taxes associated with relocation expenses. 1997
Other Annual Compensation for Messrs. Davis, Budney, Sylvia and Powers and
Ms. Kerr represents amounts reimbursed for payment of taxes associated with
non-cash compensation.
(D) In 1995, 57,500 stock units were granted to the above named executive
officers pursuant to the SIP adopted by the Board of Directors on December
14, 1995. These stock units vested and became payable on December 31, 1997.
No dividend equivalents were credited on these stock units. The 1995 values
listed in the table were calculated by multiplying the stock units granted
by the closing market price of the company's stock ($9.875) on the date of
the grant (December 31, 1995).
In 1996, 109,750 stock units were granted to the above named executive
officers pursuant to the LTIP adopted by the Board of Directors on September
25, 1996. These grants were made for the three-year period January 1, 1996,
through December 31, 1998, and vest and become payable on December 31, 1998.
The 1996 values listed in the table were calculated by multiplying the stock
units granted by $8.00, the price at the time these stock unit grants were
determined. Dividend equivalents, if any, will be credited on these grants
and will be paid when the related stock units are paid. For Mr. Powers, the
value also includes the value of stock units granted in 1996 under the 1995
SIP.
19
<PAGE>
In 1997, 79,600 stock units were granted to the above named executive
officers pursuant to the LTIP adopted by the Board of Directors on September
25, 1996. These grants were made for the three-year period January 1, 1997,
through December 31, 1999, and vest and become payable on December 31, 1999.
The 1997 values listed in the table were calculated by multiplying the stock
units granted by $10.625, the price at the time these stock unit grants were
determined. Dividend equivalents, if any, will be credited on these grants
and will be paid when the related stock units are paid.
As of the end of the 1997 fiscal year, based on a closing market price of
$10.50, Mr. Davis held 105,000 stock units having a market value of
$1,102,500; Mr. Budney held 55,000 stock units having a market value of
$577,500; Mr. Sylvia held 35,350 stock units having a market value of
$371,175; Mr. Powers held 25,750 stock units having a market value of
$270,375; and Ms. Kerr held 25,750 stock units having a market value of
$270,375.
(E) All Other Compensation for 1997 includes: employer contributions to the
Company's Employees' Savings Fund Plan: Mr. Davis ($4,800), Mr. Sylvia
($4,800), Mr. Powers ($4,800), and Ms. Kerr ($4,800); taxable portion of
life insurance premiums: Mr. Davis ($13,743), Mr. Budney ($2,436), Mr.
Sylvia ($3,537), Mr. Powers ($3,528), and Ms. Kerr ($1,653); employer
contributions to the Company's Excess Benefit Plan: Mr. Davis ($8,715), Mr.
Sylvia ($1,837), Mr. Powers ($560), and Ms. Kerr ($1,500); directors fees
received from Opinac: Mr. Davis ($15,000), Mr. Budney ($14,000), and Mr.
Powers ($11,000); lump sum payment for accrued, unused vacation upon
retirement: Mr. Powers ($62,490); severance allowance paid pursuant to
Employment Agreement: Mr. Powers ($105,500); personal travel allowance: Mr.
Sylvia ($979).
The following table discloses, for the Chairman of the Board and Chief
Executive Officer, Mr. William E. Davis and the other named executive officers,
the number and terms of SARs granted during the fiscal year ended December 31,
1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------
<S> <C> <C> <C> <C> <C>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES GRANT DATE
GRANTED IN FISCAL EXERCISE OR EXPIRATION PRESENT VALUE
NAME (#) YEAR BASE PRICE ($/SH) DATE (A) ($)(B)
- ------------------------------ ------------- --------------- ----------------- ------------ -------------------
W. E. Davis................... 70,000 23.62% 10.30 12/31/2006 249,200
A. J. Budney, Jr.............. 35,000 11.81% 10.30 12/31/2006 124,600
B. R. Sylvia.................. 22,200 7.49% 10.30 12/31/2006 79,032
J. W. Powers.................. 16,000 5.40% 10.30 12/31/2006 56,960
D. D. Kerr.................... 16,000 5.40% 10.30 12/31/2006 56,960
</TABLE>
- ------------------------
(A) SARs granted in 1997 under the LTIP become exercisable January 2, 2000. All
SARs become exercisable upon a change in control.
(B) The grant date present value of SARs is calculated using the Black-Scholes
Option Pricing Model with the following assumptions: market price of the
stock at the September 29, 1997 grant date ($10.30); exercise price of
rights that expire on December 31, 2006 ($10.30); stock volatility (0.2957);
dividend yield (2.86%); risk free rate (6.00%); exercise term (10 years);
Black-Scholes ratio (0.3454); and Black-Scholes value ($3.56) for rights
that expire on December 31, 2006. Stock volatility and dividend yield
assumptions are based on 36 months of results for the period ending December
31, 1997.
The following table summarizes exercises of options by the Chairman of the
Board and Chief Executive Officer, Mr. William E. Davis, and the other named
executive officers, the number of unexercised options held by them and the
spread (the difference between the current market price of the stock
20
<PAGE>
and the exercise price of the option, to the extent that market price at the end
of the year exceeds exercise price) on those unexercised options for fiscal year
ended December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING OPTIONS/SARS AT
UNEXERCISED OPTIONS/SARS FISCAL YEAR-END
AT FISCAL YEAR END (#) ($) (A)
-------------------------- -----------------
<S> <C> <C> <C> <C> <C>
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ---------------------------------------- ----------------- ----------------- ----------- ------------- -----------------
W. E. Davis............................. 0 0 32,625 312,500 0
A. J. Budney, Jr........................ 0 0 0 156,000 0
B. R. Sylvia............................ 0 0 13,000 99,700 0
J. W. Powers............................ 0 0 9,000 68,000 0
D. D. Kerr.............................. 0 0 6,000 68,000 0
<CAPTION>
<S> <C>
NAME UNEXERCISABLE
- ---------------------------------------- -------------
W. E. Davis............................. 239,000
A. J. Budney, Jr........................ 119,500
B. R. Sylvia............................ 75,690
J. W. Powers............................ 78,200
D. D. Kerr.............................. 54,450
</TABLE>
- ------------------------
(A) Calculated based on the closing market price of the Corporation's common
stock on December 31, 1997 ($10.50).
NIAGARA MOHAWK POWER CORPORATION
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN(1)
VS. S&P 500, EEI AND PEER GROUP OF EASTERN REGION UTILITIES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL SHAREHOLDERS RETURNS
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1997
NMPC 100 110.46 83.26 60.67 63.07 67.06
S&P 500 Index 100 110.08 111.53 153.45 188.68 251.63
EEI Index 100 111.66 97.28 123.91 123.13 159.17
Peer Group 100 109.15 93.87 124.16 122.02 158.83
</TABLE>
Assumes $100 invested on December 31, 1992 in Niagara Mohawk stock, S&P 500,
EEI and Eastern Region utilities. All dividends assumed to be reinvested over
the five-year period.
In prior years, the Company has compared its five-year total shareholder
returns to a peer group comprised of the 23 eastern region utilities listed
below. In future years, the Company intends to compare its total shareholder
returns to the Edison Electric Institute Combination Gas and Electric Investor-
Owned Utilities Index ("EEI Index"), which is a published industry index. In
view of the nationwide deregulation of the electric and gas utility industry,
the Company believes that a national peer group, such as the EEI Index, is more
appropriate than the regional utility peer group used in prior years.
Furthermore, the EEI Index is composed entirely of combination electric and gas
utilities, like Niagara Mohawk.
21
<PAGE>
PEER GROUP OF EASTERN REGION UTILITIES:
<TABLE>
<S> <C> <C>
Allegheny Energy Inc. Delmarva Power & Light Co. Northeast Utilities
Atlantic Energy, Inc. Eastern Utilities Associates Orange & Rockland Utilities
Baltimore Gas & Electric General Public Utilities Corp. Inc.
Company Keyspan Energy Corp. PECO Energy Company
Boston Edison Company Long Island Lighting Co. PP&L Resources Inc.
Central Hudson Gas & Electric National Fuel Gas Company Public Service Enterprise Group
Corp. New England Electric System Inc.
Central Maine Power Co. New York State Electric & Gas Rochester Gas & Electric Corp.
Consolidated Edison Co. of Corp. The United Illuminating
New York, Inc. Company
DQE, Inc.
</TABLE>
- ------------------------
(1) Total returns for each Eastern Region Utility were determined in accordance
with the Securities and Exchange Commission's regulations, i.e., weighted
according to each issuer's stock market capitalization.
RETIREMENT BENEFITS
The following table illustrates the maximum aggregate pension benefit, with
certain deductions for Social Security, payable by the Company under both the
Niagara Mohawk Pension Plan ("Basic Plan") and the Company's Supplemental
Executive Retirement Plan ("SERP") to an officer in specified average salary and
years-of-service classifications. Such benefit amounts have been calculated as
though each officer selected a straight life annuity and retired on December 31,
1997 at age 65. The amount of compensation taken into account under a
tax-qualified plan is subject to certain annual limits (adjusted for increases
in the cost of living, $150,000 in 1996 and $160,000 in 1997). This limitation
may reduce benefits payable to highly compensated individuals.
ANNUAL RETIREMENT ALLOWANCE
<TABLE>
<CAPTION>
3-YEAR AVERAGE 10 YEARS 20 YEARS 30 YEARS 40 YEARS
ANNUAL SALARY SERVICE* SERVICE SERVICE SERVICE
- ------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$150,000.................................. $ 21,090 $ 81,948 $ 81,948 $ 81,948
225,000................................... 23,555 126,948 126,948 126,948
300,000................................... 23,869 171,948 171,948 171,948
375,000................................... 23,869 216,948 216,948 216,948
450,000................................... 23,869 261,948 261,948 261,948
525,000................................... 23,869 306,948 306,948 306,948
</TABLE>
- ------------------------
* Subject to five-year average annual salary.
The credited years of service under the Basic Plan and the SERP for the
individuals listed in the Summary Compensation Table are Mr. Davis, 8 years; Mr.
Budney, 3 years; Mr. Sylvia, 7 years; Mr. Powers, 34 years; Ms. Kerr, 24 years.
The Basic Plan, a noncontributory, tax-qualified defined benefit plan,
provides all employees of the Company with a minimum retirement benefit related
to the highest consecutive five-year average compensation. Compensation covered
by the Basic Plan includes only the participant's base salary or pay, subject to
the maximum annual limit noted above. Directors who are not employees are not
eligible to participate.
The SERP is a nonqualified, noncontributory defined benefit plan providing
additional benefits to certain officers of the Company upon retirement after age
55 who have 20 or more years of employment. The Committee may grant exceptions
to these requirements. The SERP provides for payment monthly of an amount equal
to the greater of (i) 60% of monthly base salary averaged over the final 36
months of employment, less benefits payable under the Basic Plan, retirement
benefits accrued during previous employment and one-half of the maximum Social
Security benefit to which the participant may be entitled
22
<PAGE>
at the time of retirement, or (ii) benefits payable under the Basic Plan without
regard to the annual benefit limitations imposed by the Internal Revenue Code.
Participants in the SERP may elect to receive their benefit in a lump sum
payment, provided certain established criteria are met.
EMPLOYEE AGREEMENTS
The Company entered into employment agreements with Messrs. Davis, Budney,
Sylvia and Powers and Ms. Kerr, effective as of December 20, 1996, which
superseded their prior agreements with the Company. The agreements have a
three-year term, and, unless either party gives 60 days prior notice to the
contrary, the agreements are extended at the end of each year for an additional
year. In the event of a change in control (as defined in the agreement), the
agreement will remain in effect for a period of at least 36 months thereafter
unless a notice not to extend the term of the agreement was given at least 18
months prior to the change in control. The agreements provide that the executive
will receive a base salary at the executive's current annual salary or such
greater amount determined by the Company and that the executive will be able to
participate in the Company's incentive compensation plans according to their
terms. In addition, the executive is entitled to business expense reimbursement,
vacation, sick leave, perquisites, fringe benefits, insurance coverage and other
terms and conditions of the agreement as are provided to employees of the
Company with comparable rank and seniority. Under an amendment to the agreements
effective as of June 9, 1997, if an executive has completed eight years of
service and attained age 55 at the time of the executive's termination of
employment, the executive (and eligible dependents) will be entitled to coverage
for medical, prescription drug, dental and hospitalization benefits equal to
those provided by the Company on March 26, 1997 for the remainder of the
executive's life with all premiums therefor paid by the Company. If an executive
has completed eight years of service but has not attained age 55 upon
terminating employment, such benefits will be provided when the executive
attains age 55.
The employment agreements also provide that the executive's benefits under
the SERP will be based on the executive's salary, annual incentive awards and
SIP awards, as applicable. Further, if the executive's employment is terminated
by the Company without cause (whether prior to or after a change in control), or
by the executive for good reason after a change in control, or after completing
eight years of service, the agreements provide that the executive will be deemed
fully vested under such plan without reduction for early commencement. If the
executive is under age 55 at the time of such termination, the executive will be
entitled to a fully vested benefit under the SERP upon attaining age 55, without
reduction for early commencement.
The agreements restrict under certain circumstances prior to a change in
control the executive's ability to compete with the Company and to use
confidential information concerning the Company. In the event of a dispute over
an executive's rights under the executive's agreement following a change in
control of the Company, the Company will pay the executive's reasonable legal
fees with respect to the dispute unless the executive's claims are found to be
frivolous.
If the executive's employment is terminated by the Company without cause
prior to a change in control (as defined in the agreement), the executive will
be entitled to a lump sum severance benefit in an amount equal to two times the
executive's base salary plus an amount equal to two times the greater of the
executive's (i) most recent annual incentive award or (ii) average annual
incentive award paid over the previous three years (a portion of the value of
the SIP awards to the executive will be treated as incentive awards for 1996 and
1997 for this purpose). In addition, the executive will receive a pro rata
portion of the incentive award which would have been payable to the executive
for the fiscal year in which termination of employment occurs, provided that the
executive has been employed for 180 days in such fiscal year. In the event of
such termination of employment, the executive will also be entitled to continued
participation in the Company's employee benefit plans for two years, coverage
for the balance of the executive's life under a life insurance policy providing
a death benefit equal to 2.5 times the executive's base salary at
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termination and payment by the Company of fees and expenses or any executive
recruiting or placement firm in seeking new employment.
If, following a change in control, the executive's employment is terminated
by the Company without cause or by the executive for good reason (as defined in
the agreement), the executive will be entitled to a lump sum severance benefit
equal to four times the executive's base salary. The executive will also be
entitled to the additional benefits referred to in the last sentence of the
preceding paragraph, except that employee benefit plan coverage for medical,
prescription drug, dental and hospitalization benefits will continue for the
remainder of the executive's life with all premiums therefor paid by the Company
and coverage under other employee benefit plans will continue for four years. In
the event that the payments to the executive upon termination of employment
following a change in control would subject the executive to the excise tax on
excess parachute payments under the Internal Revenue Code, the Company will
reimburse the executive for such excise tax (and the income tax and excise tax
on such reimbursement).
In November 1994, the Company entered into a supplemental agreement with Mr.
Powers in exchange for his foregoing retirement under the Company's Voluntary
Employee Reduction Program and continuing employment with the Company until
December 31, 1996. This agreement was modified by an agreement between Mr.
Powers and the Company entered into in October 1996 in exchange for his
foregoing retirement on December 31, 1996, and continuing employment with the
Company for up to twelve additional months. Mr. Powers retired from the Company
effective December 31, 1997. Under the agreements, Mr. Powers became entitled to
a lump sum payment following the successful closing of the sale of HYDRA-CO
Enterprises, Inc., and to a severance allowance equal to one-half of his annual
salary in effect on December 31, 1996, which was paid to him in January 1997.
The agreements also provide that Mr. Powers would be entitled to (i) a SIP award
of 7,500 stock units and 9,500 SARs, which would be fully vested (assuming
retirement during 1997) and payable (in the case of stock units) or exercisable
(in the case of SARs) on December 31, 1997, (ii) long-term incentive grants
equivalent to those provided to other senior vice presidents for the 1996-1998
and 1997-1999 cycles (prorated for his period of service during those cycles),
(iii) a lump sum payment for unused vacation for 1995, 1996 and 1997 upon
retirement and (iv) "grandfathered" retiree medical coverages in effect on
December 31, 1996. Under the agreements Mr. Powers also is entitled to a benefit
under the Company's SERP no less than his benefit calculated as of November
1994, and to have the fees he received as a member of the board of directors of
Opinac (or would have received in the event that such fees are eliminated) taken
into account in calculating his benefit under this plan period. In January 1997,
the Committee agreed that if Mr. Powers elected to receive a lump sum payment of
his benefit under the SERP (which he did), it would be based on a discount rate
no higher than the applicable discount rate in effect under the plan on December
31, 1996.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive an annual retainer of
$20,000 and $1,000 per Board meeting attended. Directors who are not employees
and who chair any of the standing Board Committees receive an additional annual
fee of $3,000 and those who serve on any of the standing Board Committees,
including the chair, receive $850 per Committee meeting attended. The Company
also reimburses its directors for travel, lodging and related expenses they
incur in attending Board and Committee meetings.
The Board of Directors terminated the Outside Director Retirement Plan
effective December 31, 1995. The plan paid annual retirement benefits equal to
the annual retainer in effect at the time of retirement to outside directors who
retired on or after age 65 with 10 years of service. Directors under age 60 had
the present value of their accrued benefits as of December 31, 1995 converted
into deferred stock units ("DSUs") of equivalent value which become payable upon
the director's termination from the Board. Directors age 60 or older were given
an election to (1) continue to receive grandfathered retirement benefits based
on the annual retainer in 1995, (2) convert the present value of their accrued
benefits into DSUs, or (3) receive half the grandfathered retirement benefit and
convert half the present value of their
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accrued benefit into DSUs. Four directors elected to continue to receive the
grandfathered Retirement Plan benefits.
DSUs, administered in accordance with the terms of the Outside Director
Deferred Stock Unit Plan adopted by the Board of Directors on December 2, 1996,
are paid when a person ceases to be an outside director, either in a lump sum or
in five equal annual installments. The first DSU installment payment would be
made shortly after the director's service ends and the other installments would
be paid on the first through fourth anniversaries of such date, based on the
prevailing stock price at that time.
DSUs are credited with respect to any dividends paid during the term of
their deferral. Such dividend credits are reinvested into DSUs of equivalent
current value based on the prevailing price of the Company's Common Stock at
that time.
Commencing in 1996, and annually thereafter, each outside director is
credited with DSUs equal in value to 50% of the prevailing year's annual
retainer (60% for Committee Chairs). Accordingly, all outside directors were
credited with 1,168 DSUs (1,402 for Committee Chairs) based on a closing stock
price of $8.5625 on May 7, 1997. The beneficial stock ownership table on pages
14-15, shows the DSUs which have been credited to each of the outside directors
under this plan as of April 7, 1998.
The Company provides certain health and life insurance benefits to directors
who are not employees of the Company. Each outside director covered under the
Company's health care plans contributes approximately 20 percent of the monthly
costs associated with these plans. During 1997, the following directors received
the indicated benefits under the foregoing arrangements: Mr. Burkhardt ($3,689),
Mr. Costle ($3,178), Mr. Edmund Davis ($6,602), Mr. Donlon ($204), Mr. Gioia
($4,077), Dr. Hill ($3,306), Mr. Panasci ($212), Dr. Peterson ($2,361), Mr.
Riefler ($4,856) and Mr. Schwartz ($384). Mr. Burkhardt received a consulting
fee of $18,000 during 1997.
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PROPOSAL NO. 2: APPROVAL OF ISSUANCE OF UP TO 43 MILLION SHARES OF COMMON STOCK
TO CERTAIN INDEPENDENT POWER PRODUCERS
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BACKGROUND INFORMATION
In 1997, the Company entered into two related agreements that it believes
will significantly improve its financial condition. Pursuant to the MRA dated
July 9, 1997, as amended, among the Company and 14 IPPs, the Company has agreed
to terminate, restate or amend 27 PPAs entered into with those IPPs (the "IPP
Parties") in exchange for cash and shares of Company common stock. Pursuant to
the Company's PowerChoice Agreement, entered into with the PSC, which regulates
utilities in the State of New York, the PSC has approved the prudence of the MRA
and the Company has agreed to a five year rate plan and has agreed to divest its
fossil and hydro generating assets (the "Genco Divestiture"). The PSC entered a
written order approving the PowerChoice Agreement on March 20, 1998 and the
descriptions of the PowerChoice Agreement contained herein include any
modifications to the PowerChoice Agreement effected by that order.
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 megawatts ("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 to the 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 law 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 that available to the Company by internal generation or
from 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
obligations under the PPAs. By mid-1996, this strategy had resulted in reducing
the Company's obligations to purchase power under its PPA portfolio to
approximately 2,700 MW. Notwithstanding this reduction in capacity, over the
same time period the payments made to the IPPs in respect of their PPAs rose
from approximately $200 million in 1990 to approximately $1.1 billion in 1997 as
independent power facilities from which the Company was obligated to purchase
electricity commenced operations. The Company estimates that absent the MRA,
payments made to the IPPs pursuant to PPAs would continue to escalate by
approximately $50 million per year until 2002.
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Recognizing the competitive trends in the electric utility industry and the
impracticability of remedying the situation through a series of customer rate
increases, in mid-1996 the Company began comprehensive negotiations to
terminate, amend or restate a substantial portion of above-market PPAs in an
effort to mitigate the escalating cost of these PPAs as well as to prepare the
Company for a more competitive environment. These negotiations led to the MRA
and the PowerChoice Agreement.
THE MRA
On March 10, 1997, the Company announced an agreement in principle between
the Company and 19 IPPs representing 44 PPAs. Prior to the execution of the MRA,
the Company withdrew its offer with respect to a subgroup of three developers
representing 15 hydro contracts. Because the agreement in principle called for
the subgroup to be compensated solely through restructured contracts, their
departure did not change the amount of cash and stock payable by the Company in
the agreement in principle nor did it have a material impact upon the cost
reductions associated with such agreement.
On July 9, 1997, the agreement in principle was formalized as the MRA, which
was signed with 16 IPPs who sell electricity to the Company under 29 PPAs. The
MRA originally provided for the termination, restatement or amendment of those
29 PPAs in exchange for approximately $3,605 million in cash, 46 million shares
of Niagara Mohawk Common Stock and a series of fixed price swap contracts. The
MRA specifically contemplated that two IPPs, Oxbow Power of North Tonawanda, New
York, Inc. ("Oxbow") and NorCon Power Partners, L.P. ("NorCon") would enter into
further negotiations concerning their treatment under the MRA. Following such
negotiations, Oxbow withdrew from the MRA, but, based on the value of its
allocation under the MRA and the terms of its existing PPA, Oxbow's withdrawal
did not have a material impact upon the cost reductions associated with the MRA.
The Company and NorCon agreed to replace NorCon's initial allocation under the
MRA with an all cash allocation which had, in the Company's estimation, a value
approximately $60 million higher than NorCon's initial allocation. NorCon
subsequently withdrew from the MRA, resulting in a reduction in the cash payable
of $158 million--the Company is assessing its possible actions with respect to
NorCon's PPA. A third IPP Party has agreed to take cash in exchange for the
shares of Common Stock allocated to it in the MRA. In addition, the MRA was
amended to reduce the cash payable by approximately $157 million in exchange for
increased payments under the restated PPAs, and the Company has determined to
eliminate the fixed price swap contracts in exchange for $297 million in cash.
Finally, the MRA was amended to permit one project, Selkirk Cogen Partners, L.P.
to delay closing with respect to itself if its necessary bondholder approval is
not received by the closing and to terminate with respect to itself if such
approval is not received by August 31, 1998. The Company does not believe the
failure of this project to close would have a material adverse effect. It is
possible that the terms of the MRA, particularly the mix of consideration, will
be further renegotiated prior to the closing under the MRA, and the Company
intends to attempt to renegotiate the MRA to reduce the number of shares of
Common Stock that would be issued and increase the cash payable (or
alternatively to purchase Common Stock to use for the MRA) if Proposal 2 is
approved but Proposal 3 is not. The closing of the MRA is presently scheduled
for June 30, 1998.
The MRA now covers 14 IPPs who sell electricity to the Company under 27
PPAs, representing approximately three quarters of the Company's estimated
above-market purchased power obligations, whose PPAs will be terminated,
restated or amended in exchange for approximately $3,631 million of cash and
42.9 million shares of Niagara Mohawk Common Stock. The Common Stock to be
received by the IPPs will represent approximately 23% of the outstanding shares
of the Company's Common Stock following such issuance. Under the rules of the
New York Stock Exchange, the Company must receive its shareholders' approval to
issue this large a percentage of its shares. Under the MRA, the Company is
required to maintain a shelf registration statement under which the IPP Parties
can sell such shares for a period of two years following the consummation of the
MRA. It is possible that the terms of the MRA will be renegotiated so that the
Company will sell some portion of the 42.9 million shares directly to the public
and deliver the proceeds to the IPP Parties. The cash payment to the IPPs will
be derived from
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$3,272 million of cash proceeds from a public offering of senior unsecured debt
securities, consisting of $2,950 million of Senior Notes and $322 million of
Senior Discount Notes (collectively, the "MRA Financing") and cash on hand.
Under the MRA, 18 PPAs representing approximately 1,100 MW of electric
generating capacity will be terminated completely and 8 PPAs representing
approximately 541 MW of capacity will be restated on economic terms and
conditions that the Company believes are more favorable to it than the existing
PPAs. The restated contracts will have shorter terms (10 years) than the
existing contracts 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 10 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. Specifically, the restated
contracts are financial swap contracts which provide for cash settlement based
on fixed contract quantities for the full 10-year term of the contracts and
fixed prices for the first two years. Thereafter the prices change to a formula
based on indices of fuel cost and inflation. Until such time as a competitive
energy market structure becomes operational in the State of New York, the
restated contracts provide the IPP Parties with a put option for the physical
delivery of energy. Additionally, one PPA representing 42 MW of capacity will be
amended to reflect a shortened 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 this portfolio of PPAs could provide it and its
customers with a hedge if market prices rose substantially. The portfolio of
restated and amended PPAs contain terms that are believed to be more responsive
than the existing PPAs to competitive market price changes.
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 "Shareholder Agreements").
Pursuant to each Shareholder Agreement, the 2% Shareholders each agrees that for
five years from the date of consummation of the MRA it 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 will generally vote
their shares on a "pass through" basis, that is in the same proportion as all
shares held by other shareholders are voted, except that they may vote in their
discretion for extraordinary transactions and, when there is a pending proposal
to acquire the Company, for directors. Messrs. Alfiero and Johnson were selected
as nominees for the Board pursuant to a procedure set forth in the MRA, where
the Company and the IPP Parties agreed to a list of ten candidates from which
the Company selected two nominees. As of the closing under the MRA, certain
litigation between the Company and the IPP Parties regarding the existing PPAs
will be terminated.
Under the terms of the MRA, each IPP Party will have the right, but not the
obligation, to maintain qualifying facility ("QF") status under state or federal
law. The Company's obligations under the PPAs that will be entered into in
conjunction with consummation of the MRA will not be contingent upon the QF
status of the counterparty to the contract. In addition, the Company has agreed
that following consummation it will not engage in monitoring the QF status of
any IPP Party. The IPP Parties will at consummation waive any right under state
law to demand a 6 CENTS per Kwh minimum power purchase rate from the Company and
any right under state or federal law to require the Company to enter into a
power purchase contract or otherwise take the output of an IPP Party's project.
In addition, the IPP Parties are required to take no action to subvert the
Company's entitlement to recovery of the CTC from any third party.
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The closing of the MRA is subject to approval of Proposal 2, as well as the
closing of the financing necessary for the MRA. See "Conditions to the
Consummation of the MRA."
BOARD RECOMMENDATION
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. 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 debt. Because of the amortization of the MRA Regulatory Asset
described in the "Pro Forma Condensed Financial Statements", however, earnings
will be substantially depressed for at least five years. Nonetheless, the Board
believes that the MRA, coupled with the PowerChoice Agreement, which provides a
rate plan that will allow the Company to meet its financial obligations and
provide for the recovery of its stranded costs through the CTC, exit fees and
back-up rates, provides the Company with financial stability and creates an
improved platform from which to build shareholder value. See "The PowerChoice
Agreement".
Accordingly, the Board of Directors has unanimously approved the MRA and
recommends that shareholders approve the issuance of shares of Common Stock to
the IPP Parties. Absent the MRA, the Board believes the Company's financial
condition will continue to deteriorate, potentially requiring the Company
ultimately to seek protection from creditors under Chapter 11 of the United
States Bankruptcy Code ("Bankruptcy"), unless some other alternative could be
found. In addition, the Board believes the MRA provides greater potential for
growth in shareholder value than the other alternatives available to the
Company.
In reaching this determination, the Board considered the advice of the
Company's financial advisor, Donaldson, Lufkin & Jenrette ("DLJ"). DLJ was
retained by the Company to act as its financial advisor in connection with the
transactions contemplated by the MRA, and to render its opinion with respect to
the relative value from a financial point of view for holders of the Common
Stock of (a) the Company consummating the MRA Transactions and (b) the Company
not consummating the MRA Transactions, in each case making the PowerChoice
Assumption. For the purposes of DLJ's opinion, the "MRA Transactions" are
defined as the termination, restatement or amendment of 27 PPAs between the
Company and the 14 IPP Parties in exchange for cash and Common Stock, and the
financing of a portion of such cash payments through the issuance of debt
securities in a public offering; and the "PowerChoice Assumption" is defined as
an assumption, for comparative purposes only, that the Company will be subject
to the five-year rate and tariff structure and the requirement to divest certain
generating assets contained in the PowerChoice Agreement whether or not the
Company consummates the MRA Transactions. DLJ was retained based on its
experience, expertise in the electric utility industry, reputation and prior
relationship with the Company.
DLJ has delivered its written opinion, dated May 14, 1998, to the Company's
Board of Directors to the effect that, based upon and subject to the various
considerations and assumptions set forth in such opinion, as of May 14, 1998,
the consummation by the Company of the MRA Transactions would provide a higher
relative value from a financial point of view for the holders of Common Stock
than the failure of the Company to consummate the MRA Transactions, in each case
making the PowerChoice Assumption. The summary of the DLJ opinion set forth in
this Prospectus/Proxy Statement is qualified in its entirety by reference to the
full text of such opinion, which is set forth in Exhibit D to this
Prospectus/Proxy Statement. Shareholders are urged to read such opinion
carefully in its entirety in connection with this Prospectus/Proxy Statement for
assumptions made and matters considered in connection with, and limits of, the
review by DLJ.
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The DLJ opinion addresses solely the relative value from a financial point
of view for holders of Common Stock of the Company consummating or not
consummating the MRA Transactions, in each case making the PowerChoice
Assumption. The DLJ opinion does not address the Company's underlying business
decision to terminate, restate or amend its PPAs pursuant to the MRA or the
business judgment of the Board in entering into the MRA (or the PowerChoice
Agreement), and was not a recommendation to the Board, and is not a
recommendation to the Company's shareholders, as to whether to approve or vote
for Proposal No. 2. The DLJ opinion also does not address the amount, form or
structure of compensation to be paid to the IPP Parties as part of the MRA
Transactions. Although DLJ evaluated the relative value from a financial point
of view of the Company consummating or not consummating the MRA Transactions for
holders of Common Stock, the MRA was the result of arms length negotiations
among the Company and the IPP Parties thereto. Except as set forth above with
respect to the PowerChoice Assumption, the Company did not provide specific
instructions to, or place any limitations upon, DLJ with respect to the
procedures to be followed or factors to be considered by DLJ in performing its
analyses or rendering the DLJ opinion. DLJ has not been requested by the
Company, and does not intend, to update such opinion based on information
following the date it was rendered.
In arriving at the DLJ opinion, DLJ reviewed, among other things: (i) the
financial terms and conditions of the PPAs to be terminated, restated or amended
by the MRA, and of the MRA, the PowerChoice Agreement and the proposed financing
of the MRA Transactions; (ii) Annual Reports to Stockholders and Annual Reports
on Form 10-K of the Company for the five fiscal years ended December 31, 1997;
(iii) certain internal financial analyses and projections, including the
Company's estimates of future market prices for electricity, analyses and
projections of revenues and certain operating costs and financial savings
expected to be achieved as a result of the consummation of the MRA, estimates of
the amount of proceeds to be received from the sale of certain generating assets
and the use of such proceeds as a result of the PowerChoice Agreement, provided
to DLJ by the Company; and (iv) publicly available financial data and stock
market performance data of companies which DLJ deemed comparable in relevant
respects to the Company. DLJ also held discussions with (a) members of the
senior management of the Company regarding the current and historical business
operations, financial condition and prospects of the Company and their analyses
of financial and strategic benefits of the MRA and the PowerChoice Agreement,
including, without limitation, the amount and timing of realization of the
savings and sales proceeds referred to above; (b) the Company's independent
auditors concerning accounting and financial aspects of the MRA Transactions,
the PowerChoice Agreement and the PPAs; and (c) the Company's legal counsel
concerning legal, structural, regulatory and tax aspects of the MRA
Transactions, the PowerChoice Agreement and the PPAs. In addition, DLJ performed
such other financial studies, analyses and investigations, and took into account
such other matters, as DLJ considered appropriate for purposes of rendering the
DLJ opinion.
In connection with its review, DLJ did not independently verify any of the
foregoing information or any underlying assumptions, including the Company's
estimates of future market prices for electricity, cost savings expected to be
achieved from the consummation of the MRA Transactions, and the amount, timing
and application of the proceeds from the divestiture of certain of the Company's
generating assets pursuant to the PowerChoice Agreement, and relied on the
accuracy and completeness of all financial and other information that was
available to DLJ from public sources, that was provided to DLJ by the Company or
its representatives, or that was otherwise reviewed by DLJ, including the
possible outcomes provided by the Company of legal, regulatory and other
contingencies. With respect to the financial projections supplied to DLJ by the
management of the Company, DLJ assumed that they had been reasonably prepared on
the basis reflecting the best currently available estimates and judgment of the
management of the Company as to the future financial performance of the Company
and as to the possible outcomes of legal, regulatory and other contingencies.
DLJ did not and does not assume any responsibility for the information or
projections provided to it, and DLJ has further relied upon the assurances of
the management of the Company that they are unaware of any facts that would make
the information or projections provided to DLJ incomplete or misleading. In
addition, DLJ did not make any independent
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evaluation and appraisal of the assets and liabilities of the Company and DLJ
has not been furnished with any such evaluation or appraisal. In arriving at its
opinion, DLJ assumed, with the Company's consent, that the consummation of the
MRA would result in a regulatory asset to be amortized generally over ten years
under generally accepted accounting principles. In addition, DLJ assumed that
the Company will have recognized and deducted for income tax purposes an amount
representing the total compensation paid pursuant to the MRA. This deduction
will result in the creation of a net operating loss which the Company will
utilize over a short time period. The DLJ opinion is necessarily based on
economic, financial, market and other conditions, and the information made
available to it, as of its date thereof.
In rendering the DLJ opinion, DLJ performed a variety of financial analyses,
which are summarized below, to determine the relative value from a financial
point of view for holders of Common Stock of (a) the Company consummating the
MRA Transactions (the "MRA Scenario") and (b) the Company not consummating the
MRA Transactions (the "Status-Quo Scenario"), in each case making the
PowerChoice Assumption. DLJ evaluated the relative value of these scenarios for
the common shareholders of the Company based on two valuation methodologies: (i)
comparable public company analysis; and (ii) discounted cash flow analysis
("DCF"). In addition, DLJ performed a cost structure and cash flow analysis to
measure the impact of the MRA Transactions on the Company's liquidity.
COMPARABLE PUBLIC COMPANY ANALYSIS. In order to establish financial
benchmarks for its analyses, DLJ compiled certain publicly available historical
financial information for both the Company and the following publicly traded
companies in the electric and gas utility industry: AGL Resources Inc., Boston
Edison Company, DTE Energy Company, DQE Inc., Entergy Corp., Illinova Corp., MCN
Corp., National Fuel Gas Company, New York State Electric & Gas Company, Nicor
Inc., Peco Energy Company, People's Energy Corp., Texas Utilities Company, UGI
Corp. and Washington Gas Light Company (collectively, the "Public Comparables").
The Public Comparables were chosen because, in DLJ's judgment, they represent
publicly traded companies with operations that for purposes of analysis may be
considered similar to those of the Company.
DLJ examined, among other things, the following trading multiples for each
of the Public Comparables and the Company: (i) Enterprise Value/LTM revenues;
(ii) Enterprise Value/LTM EBITDA; (iii) Enterprise Value/LTM EBIT; (iv) Equity
Value/CY 1998 net income; (v) Equity Value/CY 1999 net income, and (vi) Equity
Value/book value. These terms are defined as follows: "Enterprise Value" is
market capitalization plus the principal amount of debt and liquidation value of
preferred stock LESS cash and cash equivalents; "LTM" is the latest twelve month
period for which financial statements were publicly available; "EBITDA" is
earnings before interest, income taxes, depreciation and amortization; "EBIT" is
earnings before interest and income taxes; "Equity Value" is the market
capitalization; CY 1998 and 1999 net income is average estimated 1998 and 1999
net income, respectively, as reported in First Call, which is a readily
available compilation of estimates by research analysts; and "Book Value" is the
book value at the end of the most recent reporting period.
The following table sets forth the trading multiples for the Public
Comparables:
<TABLE>
<CAPTION>
PUBLIC COMPARABLES
---------------------------------
AVG.(1) LOW HIGH
----------- --------- ---------
<S> <C> <C> <C>
Enterprise Value/
LTM Revenues.......................................................................... 2.0x 1.1x 3.2x
LTM EBITDA............................................................................ 7.5 5.2 12.3
LTM EBIT.............................................................................. 11.3 9.3 21.8
Equity Value/
CY 1998 Net Income.................................................................... 14.8x 11.1x 19.0x
CY 1999 Net Income.................................................................... 13.8 10.9 16.2
Book Value............................................................................ 1.8 0.9 2.6
</TABLE>
- ------------------------
(1) Average excludes high and low.
31
<PAGE>
Although DLJ considered each of the foregoing multiples, DLJ used the
Enterprise Value/LTM EBITDA multiple for purposes of its valuation analyses of
the Company because, in DLJ's judgment, EBITDA is the best indicator of the
enterprise's internal cash flow and ability to delever, which will be a
significant determinant of future equity value. In DLJ's opinion, traditional
methods of utility company equity valuation, including those based on earnings
multiples and dividend discount analyses, are not as well-suited for the
valuation of the Company. Net income was not considered as useful an indicator
of value because of the significant leverage incurred by the Company to fund its
cash obligations under the MRA and the non-cash charges from amortization of the
regulatory asset created in connection with the MRA which will initially depress
the Company's earnings. Dividend payout was not considered as useful an
indicator of value because the Company will be restricted by its cash flows and
the terms of its senior bank facility and public debt from paying dividends. As
a result, DLJ believes that net income or dividend payout based valuation
methodologies would underestimate the fair value of the common equity of the
Company.
In applying the foregoing to the Company, DLJ determined that the Company
was unlikely to be valued at full industry multiples under either the MRA
Scenario or the Status-Quo Scenario. Under the MRA Scenario, the Company would
likely be valued at a discount to the Public Comparables because of (i) the
Company's high leverage (64.9% debt/total capitalization) relative to the
utility industry (47.8% debt/total capitalization) and (ii) depressed reported
net income as a result of the amortization of the regulatory asset created in
connection with the MRA. For these reasons, under the MRA Scenario, the
comparable company analysis assumes an average Enterprise Value/EBITDA multiple
of 7.0x, representing a slight discount (7%) to the Public Comparables' average
of 7.5x, and a range of Enterprise Value/ EBITDA multiples of 6.5x--7.5x,
representing a 13%--0% discount to the Public Comparables' average of 7.5x.
In the Status-Quo Scenario, in DLJ's judgment, it is appropriate to apply a
significantly larger discount to the Public Comparables because of (i) the
magnitude of the Company's IPP payment problem and the resulting erosion of the
Company's financial health; (ii) the financial uncertainty regarding the
Company's ability to continue to service its long-term obligations, including
its above-market PPAs, without commensurate recovery of such costs from
customers; and (iii) the likely inability of the Company to access the bank or
public capital markets to meet working capital needs and/or to refinance
long-term debt as necessary as a result of the Company's deteriorating financial
performance. For these reasons, under the Status-Quo Scenario, the comparable
company analysis assumes an average Enterprise Value/ EBITDA multiple of 5.0x,
representing a 33% discount to the Public Comparables' average of 7.5x and a
range of Enterprise Value/EBITDA multiples of 4.5x--5.5x, representing a
40%--27% discount to the Public Comparables' average of 7.5x.
Based on the analyses and assumptions described above, DLJ concluded that
the value from a financial point of view for holders of Common Stock based on
Enterprise Value/LTM EBITDA multiples was higher under the MRA Scenario than
under the Status-Quo Scenario.
DCF ANALYSIS. DLJ performed a DCF analysis of the Company based on
management's projections of future cash flows under both the MRA Scenario and
the Status-Quo Scenario. In DLJ's judgment, certain assumptions under this
analysis would differ significantly under the MRA Scenario as compared to the
Status-Quo Scenario.
Under the MRA Scenario, the Company's weighted average cost of capital is
estimated to be 8.0%. This is based on three factors: (a) an assumption that the
Company's targeted long-term capital structure is 50% debt and 50% equity, which
reflects the average capital structure of the utility industry; (b) a weighted
average cost of debt for the Company based on borrowing rates available to
companies with the ratings conditionally assigned to the Company; and (c) a
weighted average cost of equity for the Company based on the Public Comparables.
Additionally, DLJ applied a terminal Enterprise Value/EBITDA multiple of 7.0x to
the Company's EBITDA in 2008, which reflects a slight (7%) discount to the
Enterprise Value/
32
<PAGE>
EBITDA multiple of the Public Comparables, reflecting the assumed stabilized
operating prospects of the Company in the future. In addition, DLJ's valuation
under the MRA Scenario reflects the assumed cash flow benefits from the
significant net operating loss ("NOL") which is created in recognition of the
expense incurred to consummate the MRA.
Under the Status-Quo Scenario, the Company's weighted average cost of
capital has been adjusted upward to 13.5% to reflect the continuing erosion of
the Company's financial situation as a result of (i) the above-market escalating
payment obligation imposed by the PPAs; and (ii) uncertainty in the capital
markets associated with the Company's likely inability to service its PPAs and
other fixed obligations during the forecast period. Additionally, DLJ applied a
terminal Enterprise Value/EBITDA multiple averaging 5.0x to the Company's EBITDA
in 2008 to reflect a 33% discount to the Enterprise Value/ EBITDA multiple of
the Public Comparables based on the declining operating prospects of the Company
under the Status-Quo Scenario. Finally, there is no tax NOL in the Status-Quo
Scenario.
Based on the analyses and assumptions described above, the value from a
financial point of view for holders of Common Stock based on a DCF analysis was
higher under the MRA Scenario than under the Status-Quo Scenario.
COST STRUCTURE AND CASH FLOW ANALYSIS. The Company negotiated the MRA to
address the serious liquidity problem posed by its above-market PPAs. Under the
MRA Scenario, the Company's cost of electricity purchased from the IPPs will
decline significantly, resulting in substantial savings to the enterprise on a
cash flow basis, which will be more than sufficient to offset the additional
interest expense and principal repayments associated with the indebtedness
incurred to finance the MRA. Based on the assumptions and information available
to it, DLJ calculated the total cash savings (in nominal terms) to the Company
under the MRA Scenario compared to the Status-Quo Scenario for the periods
1998-2003, 1998-2008 and 1998-2013 to be $654 million, $2.0 billion and $3.3
billion, respectively, assuming consummation of the MRA Transactions on July 1,
1998. Based on the resulting higher EBITDA of the Company, DLJ concluded that
the value from a financial point of view for holders of Common Stock is higher
under the MRA Scenario than under the Status-Quo Scenario.
DLJ has indicated to the Company that it believes that its analysis must be
considered as a whole and that selecting portions of the factors considered and
analyses performed, without considering all factors and analyses, could create
an incomplete view of the processes underlying DLJ's analyses and the DLJ
opinion. The preparation of an opinion such as the DLJ opinion is a complex
process and is not necessarily susceptible to partial analysis or summary
description. In its analyses, except as described in the immediately preceding
paragraphs, DLJ did not attribute any particular weight to any factor considered
by it; rather, DLJ made its determination from a financial point of view based
on qualitative judgments as to the significance and relevance of the financial
and comparative analyses and factors described above, taken as a whole. No
company used in the above analyses is identical to the Company. Accordingly, an
analysis of public comparables is not purely quantitative; rather, it involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the companies being compared. The analyses were
prepared solely for the purpose of assisting DLJ in providing the DLJ opinion to
the Company's Board of Directors and do not purport to be appraisals and do not
necessarily reflect the prices at which the Company's stock price may actually
trade. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than those set forth herein. Because such estimates are inherently
subject to uncertainty, DLJ assumes no responsibility for their accuracy.
In performing the above analyses, DLJ was not expressing any opinion as to
the price or range of prices at which the Company's Common Stock or any other
securities of the Company may trade subsequent to the consummation of the MRA
Transactions or otherwise, which may vary depending upon, among other factors,
changes in the operating activities and results of the Company, interest rates,
dividend rates, market conditions, general economic conditions and other factors
that generally influence
33
<PAGE>
the price of securities, as well as regulatory policies and the uncertainties
facing the electric utility industry as it transitions to competition.
Further, the DLJ opinion is necessarily based on economic, monetary,
financial, market, legislative, regulatory and other conditions in effect on,
and the information made available to DLJ as of, the date that it was rendered.
In this regard, with respect to the pricing and other terms of the debt
financing to be incurred as part of the MRA Transactions, DLJ assumed that such
financing will be obtained on terms currently available in the market to issuers
that DLJ believes are comparable to the Company. There can be no assurance that
such terms will be available to the Company, or that any such debt financing
will in fact be available when it seeks financing.
DLJ, as part of its investment banking services, is regularly engaged in the
valuation of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. DLJ
is currently acting as financial advisor to the Company and has received, and
will continue to receive, fees for such services. A significant portion of DLJ's
advisory fee is contingent upon the successful termination, restatement or
amendment of the Company's obligations under the PPAs pursuant to the MRA or
otherwise. For its services as financial advisor, DLJ will receive a monthly
retainer fee, a cash success fee payable at the closing of the MRA and stock
appreciation rights which can be exercised at any time prior to December 31,
2000. In addition, DLJ is currently acting as the lead managing underwriter for
a proposed issuance of debt securities that is part of the MRA Transactions, and
has agreed to provide other investment banking services to the Company, and will
receive customary commissions and fees in connection therewith. The Company has
agreed to indemnify DLJ and certain related parties against certain liabilities
in connection with its advisory and investment banking engagements, and in its
role as underwriter, including certain liabilities under the federal securities
laws.
DLJ is an internationally recognized investment banking firm and in the
ordinary course of its business, DLJ may actively trade the debt and equity
securities of the Company, the IPPs and their subsidiaries for its own account
and for the accounts of customers and, accordingly, may, at any time, hold long
or short positions in such securities.
The Board also considered the presentations made by management and outside
advisors on two alternatives: unilaterally ceasing to perform under the PPAs and
commencing litigation for a judicial determination of the damages owed to the
IPPs ("Abrogation") and Bankruptcy. These analyses presented a cost to the
Company with a net present value ranging from $2.2 billion to $7 billion, with
the more likely outcome somewhere in the mid-range. To achieve that mid-range,
however, the Company would have to achieve some measure of success in litigating
or settling the following issues: whether the Company is entitled to curtail
purchases under the PPAs; whether the Company is entitled with respect to
certain PPAs to offset projected underpayments during the second part of the
contract where such payments are noneconomic to the IPP and, in most cases, the
Company's contractual remedies are expressly non-recourse to the IPP; whether
contracts based on the Six-Cent Law, which has already been invalidated by FERC
on a prospective basis, would be invalidated on a retroactive basis as well.
Except for the PSC's statement that curtailment of generation from PURPA
facilities is authorized and its request for input regarding specific
curtailment procedures, the Company has heretofore been unsuccessful with
respect to these issues in litigation or otherwise. In addition, the Company
would have to prove its projections of future market prices, on which such
analyses were based, were not too low and its discount rate used at present
valuing future damages was not too high. Moreover, the mid-range would also be
achievable only if in either scenario the IPPs were found to be capable of
mitigating hundreds of millions of dollars of their damages and, in the
Bankruptcy alternative, if the PPAs were determined to be executory contracts
that could be rejected. In considering these alternatives, the Board considered
the lengthy nature of either Abrogation or Bankruptcy proceedings, with its
concurrent risks as to the disruption to the Company during the interim,
especially during a period of rapid evolution in the utility industry, the
possibility of substantially higher interest rates at the conclusion of such
proceeding, the uncertainty, particularly in the
34
<PAGE>
Abrogation scenario, as to rates the Company would be allowed to charge in the
interim, and, in the Abrogation scenario, the Company's lack of access to
capital markets during this period. The Board also considered the expressed
desires of the state government and the PSC to seek a more rapid, consensual
arrangement. Finally, the Board bore in mind that the MRA presented a definitive
arrangement and a plan for moving the Company forward at a time when energy
markets are poised to change rapidly and dramatically across New York State and
the country generally while the alternatives could only be analyzed with
inherently imprecise estimates which are dependent on uncertain judicial
outcomes and would likely postpone action by the Company to restructure for
changing energy markets.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE HOLDERS OF COMMON STOCK VOTE IN
FAVOR OF APPROVAL OF PROPOSAL NO. 2.
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 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 New York State Gross Receipts Tax. 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, net of New
York State Gross Receipts Tax savings, are estimated to be $111.8 million, to be
phased in on a generally ratable basis 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 weighted average interest rate for the Senior Notes portion of the MRA
Financing. 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 contracts. The aggregate of the
price cap increase and recovery of deferrals is subject to an overall limitation
of inflation.
The PowerChoice Agreement provides that the MRA and the contracts executed
pursuant thereto are found to be prudent. The PowerChoice Agreement further
provides that the Company shall have a reasonable opportunity to recover its
stranded costs, including those associated with the MRA and the contracts
executed thereto, through a CTC and, under certain circumstances, through exit
fees or in rates for back-up service.
The PSC has limited the amount of the MRA Regulatory Asset that can be
recovered from customers to approximately $4.0 billion. The MRA Regulatory Asset
represents the recoverable costs of the MRA, consisting of the cash compensation
paid to the IPP Parties, the issuance of approximately 42.9 million shares of
Common Stock, and other expenses related to the MRA. The ultimate amount of the
MRA Regulatory Asset may vary based on certain events related to the closing of
the MRA. On March 26, 1998, the estimated value of the cash and Common Stock to
be paid to the IPP Parties under the MRA and related expenses was approximately
$4.167 billion, and, as a result, the Company has recorded a charge against 1997
earnings of $190.0 million. Earnings in 1998 will be adjusted to reflect, among
other things, the change in the price of the Common Stock from March 26, 1998 to
the date of the consummation of the MRA.
35
<PAGE>
The PowerChoice Agreement calls for the Company to divest all of 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. The Company agreed that if it
does not receive an acceptable bid for any 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 any 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.
Under the terms of the PowerChoice Agreement, all of the Company's customers
will be able to choose their electricity supplier in a competitive market by
December 1999. The Company will continue to distribute electricity through its
transmission and distribution systems and would be obligated to be the so-called
provider of last resort for those customers who do not exercise their right to
choose a new electricity supplier.
The PowerChoice Agreement 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 PowerChoice
approval.
The PowerChoice Agreement also allows the Company to form a holding company.
The Company, therefore, is seeking approval from its shareholders for the
formation of a holding company at its 1998 annual meeting. The implementation of
a holding company structure, if approved by the Company's shareholders, would
only occur following various regulatory approvals.
36
<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 (including 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,"
"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/Proxy Statement.
<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. 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.................................................................. 691,060 691,060
------------ -------------
2,616,457 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......................................................... $ 6,551,366 $ 10,357,366
------------ -------------
------------ -------------
</TABLE>
- ------------------------
* Under Proposal 3, the authorized common stock would be increased to 250
million shares. If Proposal 2 is approved but Proposal 3 is not, the Company
intends to either renegotiate the terms of the MRA to increase cash and
decrease the number of shares of Common Stock, or to buy sufficient shares
to be able to issue 42.9 million shares to the IPP Parties.
37
<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/Proxy Statement, as adjusted to give effect to (i) the
consummation of the MRA; (ii) the consummation of the MRA Financing; (iii) the
issuance of approximately 42.9 million shares of Common Stock to the IPP
Parties; and (iv) the principal terms of the PowerChoice Agreement, including
the first year impact of a three year rate reduction intended to reduce the
Company's revenues (exclusive of reductions in the New York State Gross Receipts
Tax) 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 3 to the Notes to unaudited Pro Forma Condensed Statement of Income) 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 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 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 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. On March 26, 1998, the
estimated value of the cash and Common Stock to be paid to the IPP Parties under
the MRA and related expenses was approximately $4.167 billion, and, as a result,
the Company recorded a charge against 1997 earnings of $190.0 million. Earnings
in 1998 will be adjusted to reflect, among other things, the change in the price
of the Common Stock from March 26, 1998 to the date of the consummation of the
MRA. See "The MRA" and "The PowerChoice Agreement" under Proposal 2.
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/Proxy Statement. 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 (including 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.
38
<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) 3,870,909
----------- ---------------- -----------
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 and (deductions):
PowerChoice charge................................................ (190,000) (190,000)
Other income...................................................... 24,997 (6,400)(5) 18,597
----------- ---------------- -----------
(165,003) (6,400) (171,403)
----------- ---------------- -----------
Income before interest charges...................................... 393,836 41,600 435,436
Interest charges.................................................... 273,906 16,500(6)
248,400(7)
(27,000)(7) 511,806
----------- ---------------- -----------
Income before federal and foreign income taxes...................... 119,930 (196,300) (76,370)
Federal and foreign income taxes.................................... 60,095 (68,700)(8) (8,605)
----------- ---------------- -----------
Net income.......................................................... 59,835 (127,600) (67,765)
Dividends on preferred stock........................................ 37,397 37,397
----------- ---------------- -----------
Balance available for common stock.................................. $ 22,438 $ (127,600) $ (105,162)
----------- ---------------- -----------
----------- ---------------- -----------
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........ $ 0.16 $ (0.56)
OTHER OPERATING DATA:
EBITDA (10)....................................................... $ 961,502 $ 1,426,702
Net cash interest (11)............................................ 226,890 446,290
Ratio of EBITDA to net cash interest (12)......................... 3.2x
Ratio of earnings to fixed charges (13)........................... 0.9x
Ratio of earnings to fixed charges and preferred dividend
requirements (13)............................................... 0.8x
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Income
39
<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 and (deductions):
PowerChoice charge................................................
Other income...................................................... 4,225 (1,600)(5) 2,625
---------- -------------- ----------
4,225 (1,600) 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.......................................................... 20,363 (32,150) (11,787)
Dividends on preferred stock........................................ 9,223 9,223
---------- -------------- ----------
Balance available for common stock.................................. $ 11,140 $ (31,150) $ (21,010)
---------- -------------- ----------
---------- -------------- ----------
Average number of shares of common stock outstanding (in
thousands)........................................................ 144,419 42,900(9) 187,319
Basic and diluted earnings per average share of common stock........ $ 0.08 $ (0.11)
OTHER OPERATING DATA:
EBITDA (10)....................................................... $ 222,273 $ 337,073
Net cash interest (11)............................................ 54,783 108,936
Ratio of EBITDA to net cash interest (12)......................... 3.1x
Ratio of earnings to fixed charges (13)........................... 1.2x
Ratio of earnings to fixed charges and preferred dividend
requirements (13)............................................... 1.1x
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Income
40
<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 and (deductions):
PowerChoice charge................................................ (190,000) (190,000)
Other income...................................................... 22,122 (6,400)(5) 15,722
------------ ----------- ------------
(167,878) (6,400) (174,278)
------------ ----------- ------------
Income before interest charges...................................... 293,321 35,600 328,921
Interest charges.................................................... 271,958 16,500(6)
244,000(7)
(27,000)(7) 505,458
------------ ----------- ------------
Income before federal and foreign income taxes...................... 21,363 (197,900) (176,537)
Federal and foreign income taxes.................................... 44,187 (69,300)(8) (25,413)
------------ ----------- ------------
Net income.......................................................... (22,824) (128,600) (151,424)
Dividends on preferred stock........................................ 37,221 37,221
------------ ----------- ------------
Balance available for common stock.................................. $ (60,045) $(128,600) $ (188,645)
------------ ----------- ------------
------------ ----------- ------------
Average number of shares of common stock outstanding (in
thousands)........................................................ 144,412 42,900(9) 187,312
Basic and diluted earnings per average share of common stock........ $ (0.42) $ (1.01)
OTHER OPERATING DATA:
EBITDA (10)....................................................... $ 859,687 $ 1,318,887
Net cash interest (11)............................................ 225,368 440,338
Ratio of EBITDA to net cash interest (12)......................... 3.0x
Ratio of earnings to fixed charges (13)........................... 0.7x
Ratio of earnings to fixed charges and preferred dividend
requirements (13)............................................... 0.6x
</TABLE>
See accompanying notes to Pro Forma Condensed Statement of Income
41
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
The following notes set forth the explanations and assumptions used and
adjustments made in preparing the unaudited Pro Forma Condensed Statement 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 Statement of Income
should be read in conjunction with the historical Consolidated Financial
Statements and the notes thereto incorporated by reference in this
Prospectus/Proxy Statement.
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 the
respective period.
The unaudited Pro Forma Statement of Income includes 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 New York State Gross Receipts Tax) 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 twelve-months ended December 31, 1997 and
March 31, 1998, approximately $12.0 million relates to residential and small
commercial customers and is calculated as a reduction in 1997 average prices of
approximately 0.08 cents per Kwh (or 0.67%) applied against sales to those
customers of 14,456,632 Kwh's. Approximately $14 million of the decrease relates
to an approximate 0.20 cents per Kwh price reduction (or approximately 2.0%) to
large commercial and small industrial customers applied against sales of
6,834,147 Kwh's. Revenue reductions to large industrial customers are comprised
of several adjustments, including a revenue reduction of $23.8 million based on
a price reduction of approximately 0.34 cents per Kwh applied against sales of
7,056,323 Kwh's, and net increases in anticipated discounts to specific
customers of $6.5 million. The pro forma adjustment for the three months ending
March 31, 1998 is based on one-quarter of the annual reserve reductions. The
actual rate reductions in any year will be affected by numerous factors such as
the volume of electricity sold and the timing of the rate reductions.
(2) To reflect a deferral of revenues required by the PSC Order. The amount
of the deferral is based on the difference between the assumed weighted average
interest rate of 8.5% used by the Company to prepare its PowerChoice proposal
and the estimated weighted average interest rate of 7.27% assumed for the Senior
Notes portion of the MRA Financing. 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
42
<PAGE>
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. The cost of such replacement power is
based on the administratively determined "buy-back" rate from QF projects, as
approved by the PSC. The amount paid under the restated and amended contracts is
based on the first year prices set forth in each of the restated and amended
contracts applied to purchases of 4,340,376 mwh for the twelve-months ended
December 31, 1997 and March 31, 1998. The quantities are also established in the
restated and amended contracts. The amount of estimated market purchases is
based on the SC-6 buy back rate of approximately $18 per mwh applied against
4,645,370 mwh and 4,391,791 of mwh of purchases for the twelve-months ended
December 31, 1997 and March 31, 1998. The amount of purchases under the restated
and amended contracts and the amount of market purchases for the three-months
ended March 31, 1998 were calculated as one-quarter of the pro forma adjustments
reflected in the twelve-month period ended March 31, 1998. 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 electricity purchased
expense by approximately $43.9 million. 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.
(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 the amendment to the MRA dated
April 22, 1998, that is reflected in the MRA Regulatory Asset. See "The MRA" and
"The Power Choice Agreement" under Proposal 2.
(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 MRA Financing 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 MRA Financing and borrowings that would have been drawn under
the Company's receivables facility in order to fund the Company's cash
obligations under the MRA. Interest charges on the indebtedness represented by
the Senior Notes portion of the MRA Financing were calculated assuming a
weighted average interest rate of 7.27% and amounted to $214.4 million, $54.3
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. The amount of accreted interest on the Senior Discount Notes was
calculated assuming an interest rate of 9% 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. A 1/8%
change in the assumed interest rate on the Senior Notes portion of the MRA
Financing would impact interest charges by $3.7 million per year. 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
43
<PAGE>
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 to the IPP Parties as part of the consideration paid to them under the
MRA.
(10) EBITDA represents earnings before interest charges, interest income,
income taxes, depreciation and amortization, amortization of nuclear fuel,
allowance for funds used during construction, MRA Regulatory Asset amortization,
the PowerChoice charge, 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 Statement of Income
contained herein and the Consolidated Statements of Cash Flows incorporated by
reference in this Prospectus/Proxy Statement.
(11) Net cash interest reflects interest charges plus allowance for funds
used during construction less the non-cash impact of the net amortization of
discount on long-term debt and interest accrued on the Nuclear Waste Act
disposal liability and interest accreted on the Senior Discount Notes that is
not otherwise capitalized less interest income.
(12) For purposes of determining the ratio of EBITDA to net cash interest,
EBITDA and net cash interest are calculated as described above in notes (10) and
(11). The ratio of EBITDA to net cash interest is presented to provide
additional information about the Company's ability to meet its future
requirements for debt service. See the Pro Forma Condensed Statement of Income
contained herein and the Consolidated Statements of Cash Flows incorporated by
reference in this Prospectus/Proxy Statement.
(13) For purposes of determining the ratio of earnings to fixed charges and
the ratio of earnings to fixed charges and preferred dividend requirements, (i)
earnings consist of income before federal and foreign income taxes plus fixed
charges; (ii) fixed charges consist of interest charges on all indebtedness,
including the portion of rental expense that is representative of the interest
factor; and (iii) preferred dividend requirements include the dividends on all
classes of preferred stock adjusted to a pre-tax basis.
44
<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 $ 3,200,200(1)
(3,644,000 (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
45
<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 2,272,078
Retained earnings............................................... 691,060 691,060
------------ ------------ -------------
2,616,457 534,000 3,150,457
Preferred stock................................................... 516,610 516,610
Long-term debt.................................................... 3,418,299 3,272,000(1) 6,690,299
------------ ------------ -------------
Total capitalization............................................ 6,551,366 3,806,000 10,357,366
Current liabilities............................................... 613,524 613,524
Regulatory liabilities............................................ 239,880 239,880
Other liabilities................................................. 2,302,813 75,000(4)
137,800(5)
(190,000 (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
46
<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/Proxy Statement.
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.
The unaudited Pro Forma Condensed Balance Sheet includes the following pro
forma adjustments based on the assumptions described below:
(1) To reflect the gross cash proceeds of $3.272 billion received by the
Company from the MRA Financing; reduced for the payment of remaining debt
issuance costs estimated by the Company to be approximately $71.8 million.
(2) To reflect the cash compensation of $3.631 billion paid to the IPP Parties
pursuant to the terms of the MRA and payment of $13.0 million in other remaining
expenses related to the MRA. Approximately $8.7 million of other expenses had
been incurred and capitalized as the MRA Regulatory Asset as of March 31, 1998.
(3) To reflect partial usage of the 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 "Certain Considerations--Federal Income Tax Implications of MRA
to the Company."
(6) To reflect the establishment of a $3.997 billion MRA Regulatory Asset
representing the recoverable costs of the MRA consisting of (i) the cash
compensation of $3.631 billion paid to the IPP Parties; (ii) the issuance of
approximately 42.9 million shares of Common Stock valued at an aggregate of
$344.0 million or $8.00 per share, based on the limitation on the amount of the
MRA Regulatory Asset, as set forth in the PSC Order; and (iii) other remaining
expenses of $13.0 million related to the MRA. Approximately $8.7 million of
other expenses had been incurred and capitalized as the MRA Regulatory Asset as
of March 31, 1998. The MRA Regulatory Asset was established pursuant to the
PowerChoice Agreement and will be amortized generally over ten years. See "The
MRA" and "The PowerChoice Agreement" under Proposal 2.
(7) To reflect the capitalization of the estimated remaining debt issuance
costs of approximately $71.8 million resulting from the MRA Financing.
47
<PAGE>
(8) To reflect the issuance of approximately 42.9 million shares of Common
Stock to the IPP Parties pursuant to the MRA. The new shares will be valued at
the price of the Common Stock on the date of the consummation of the MRA. For
purposes of developing the Pro Forma Condensed Balance Sheet, the Company used
the price of the Common Stock at the close of business on March 26, 1998, or
$12 7/16. This adjustment to common stockholders' equity will change based on
the price of the Common Stock on the date of the consummation of the MRA.
(9) To reflect the reversal of the portion of the liability associated with the
MRA recognized in 1997. The liability results from the PSC Order'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 $8.00 and the closing
price of the Common Stock on March 26, 1998 of $12 7/16 multiplied by
approximately 42.9 million shares.
48
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of the
Company for each of the five years in the period ended December 31, 1997 and for
the three months ended March 31, 1997 and March 31, 1998. The following selected
historical financial data have been derived from audited Consolidated Financial
Statements, including those incorporated in this Prospectus/Proxy Statement by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 and the Company's Quarterly Reports for the three months ended
March 31, 1997 and March 31, 1998.
The selected historical financial data presented below should be read in
conjunction with "Pro Forma Condensed Financial Statements", "Management's
Discussion of Pro Forma Financial Statements" and the audited Consolidated
Financial Statements, including the notes thereto, appearing elsewhere or
incorporated by reference in this Prospectus/Proxy Statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(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 -- -- -- -- --
Amortization of MRA Regulatory Asset... -- -- -- -- -- -- --
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 and (deductions):
PowerChoice charge..................... -- -- -- -- (190,000) -- --
Other income........................... 14,154 17,204 3,069 35,943 24,997 7,100 4,225
--------- --------- --------- --------- --------- --------- ---------
14,154 17,204 3,069 35,943 (165,003) 7,100 4,225
--------- --------- --------- --------- --------- --------- ---------
Income before interest charges............. 701,169 567,411 687,103 558,281 393,836 239,037 138,522
Interest charges........................... 282,263 278,958 279,674 278,033 273,906 67,538 65,590
--------- --------- --------- --------- --------- --------- ---------
Income before federal and foreign income
taxes.................................... 418,906 288,453 407,429 280,248 119,930 171,499 72,932
Federal and foreign income taxes........... 147,075 111,469 159,393 102,494 60,095 68,477 52,569
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary item........... 271,831 176,984 248,036 177,754 59,835 103,022 20,363
Extraordinary item......................... -- -- -- (67,364) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income................................. 271,831 176,984 248,036 110,390 59,835 103,022 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 $ 22,438 $ 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 $ 0.16 $ 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 $ 0.16 $ 0.65 $ 0.08
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
EBITDA(1).............................. $ 950,099 $1,029,865 $ 929,130 $ 957,549 $ 961,502 $ 358,863 $ 222,273
Net cash interest(2)................... 271,116 261,655 260,548 244,501 226,890 56,305 54,783
Capital expenditures(3)................ 519,612 490,124 345,804 352,049 290,757 53,552 132,354
Ratio of EBITDA to net cash
interest(4).......................... 3.5x 3.9x 3.6x 3.9x 4.2x 6.4x 4.1x
Ratio of earnings to fixed
charges(5)........................... 2.3x 1.9x 2.3x 1.6x 1.4x 3.4x 2.1x
Ratio of earnings to fixed charges and
preferred dividend requirements(5)... 2.0x 1.6x 1.9x 1.3x 1.1x 2.8x 1.4x
BALANCE SHEET DATA (AT END OF PERIOD):
Net utility plant...................... $6,877,292 $7,035,643 $7,007,853 $6,957,615 $6,868,044 $6,919,730 $6,897,664
Total assets........................... 9,471,327 9,649,816 9,477,869 9,427,635 9,584,141 9,515,010 9,707,583
Total long-term debt, including current
portion.............................. 3,474,797 3,375,845 3,647,478 3,525,963 3,484,476 3,523,412 3,485,364
Preferred stock, including current
portion.............................. 440,400 556,950 546,000 535,600 526,730 535,600 526,730
Common stockholders' equity............ 2,456,465 2,462,398 2,513,952 2,585,572 2,604,027 2,676,890 2,616,457
</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, the PowerChoice charge,
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/Proxy Statement.
(2) Net cash interest reflects interest charges plus allowance for funds used
during construction less the non-cash impact of the net amortization of
discount on long-term debt and interest accrued on the Nuclear Waste Policy
Act disposal liability less interest income.
(3) Capital expenditures consist of amounts for the Company's construction
program related to its transmission, distribution and generation operations
(including nuclear fuel, related allowance for funds used during
construction and capitalized overhead expenses), and the amounts incurred to
comply with the Clean Air Act and other environmental requirements.
(4) For purposes of determining the ratio of EBITDA to net cash interest, EBITDA
and net cash interest are calculated as described above in notes (1) and
(2). The ratio of EBITDA to net cash interest is presented to provide
additional information about the Company's ability to meet its future
requirements for debt service. See the Consolidated Statements of Cash Flows
incorporated by reference in this Prospectus/Proxy Statement.
(5) For purposes of determining the ratio of earnings to fixed charges and the
ratio of earnings to fixed charges and preferred dividend requirements, (i)
earnings consist of income before federal and foreign income taxes plus
fixed charges; (ii) fixed charges consist of interest charges on all
indebtedness, including the portion of rental expense that is representative
of the interest factor; and (iii) preferred dividend requirements include
the dividends on all classes of preferred stock adjusted to a pre-tax basis.
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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/PROXY STATEMENT, 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 "CERTAIN
CONSIDERATIONS" UNDER PROPOSALS 2 AND 4 AND ELSEWHERE IN THIS PROSPECTUS/PROXY
STATEMENT.
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 of approximately 42.9 million shares of Common Stock to the IPP
Parties; and (iv) the principal terms of the PowerChoice Agreement, including
the first year impact of a three year rate reduction intended to reduce the
Company's revenues by $111.8 million (exclusive of reductions in the New York
State Gross Receipts Tax) 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 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 New York State Gross Receipts Tax) 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 MRA Financing 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 electricity purchased
expense payable to 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
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<PAGE>
electricity purchased from the IPPs was $1.1 billion, $300.0 million and $1.1
billion, respectively, for such periods.
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 MRA Financing 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 a loss of $(67.8) million, $(11.8)
million and $(151.4) 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
(loss) of $59.8 million, $20.4 million and $(22.8) 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") in 1997 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 MRA Financing 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
52
<PAGE>
March 31, 1998, respectively. On a historical basis, the Company's EBITDA was
$961.5 million, $222.2 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 to the MRA. In addition, the Company would have
available additional borrowings of $275.0 million under the its senior bank
facility and, under the financial covenants set forth in the Indenture, would
have had the ability, subject to certain restrictions, to incur additional
indebtedness.
The Company's principal short-term and long-term liquidity requirements are
expected to consist of the payment of interest on and retirement of the First
Mortgage Bonds and the indebtedness represented by the MRA Financing, 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. 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.
53
<PAGE>
CERTAIN CONSIDERATIONS
THIS PROSPECTUS/PROXY STATEMENT CONTAINS OR INCORPORATES BY REFERENCE
STATEMENTS THAT CONSTITUTE FORWARD LOOKING INFORMATION WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ALL STATEMENTS REGARDING THE
COMPANY'S FUTURE FINANCIAL CONDITION, RESULTS OF OPERATIONS, CASH FLOWS,
FINANCING PLANS, BUSINESS STRATEGY, PROJECTED COSTS AND CAPITAL EXPENDITURES,
OPERATIONS UNDER THE MRA AND THE POWERCHOICE AGREEMENT AND WORDS SUCH AS
"ANTICIPATE", "ESTIMATE", "EXPECT", "PROJECT", "INTEND", AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS APPEAR IN
THIS PROSPECTUS UNDER THE CAPTIONS "QUESTIONS AND ANSWERS AND SUMMARY ABOUT THE
MASTER RESTRUCTURING AGREEMENT AND THE HOLDING COMPANY PROPOSAL AND SHARE
EXCHANGE", "CERTAIN CONSIDERATIONS" UNDER PROPOSALS 2 AND 4, "MANAGEMENT'S
DISCUSSION OF PRO FORMA CONDENSED FINANCIAL STATEMENTS", "THE MRA" AND "THE
POWERCHOICE AGREEMENT". SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS. ALL OF THESE FORWARD-LOOKING STATEMENTS ARE BASED
ON ESTIMATES AND ASSUMPTIONS MADE BY THE COMPANY'S MANAGEMENT WHICH, ALTHOUGH
BELIEVED BY THE COMPANY'S MANAGEMENT TO BE REASONABLE, ARE INHERENTLY UNCERTAIN.
INVESTORS ARE CAUTIONED THAT SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES
OF FUTURE PERFORMANCE OR RESULTS AND INVOLVE RISKS AND UNCERTAINTIES AND THAT
ACTUAL RESULTS OR DEVELOPMENTS MAY DIFFER MATERIALLY FROM THE FORWARD LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THE FACTORS DESCRIBED
BELOW.
SUBSTANTIAL LEVERAGE AND LIMITED FINANCIAL FLEXIBILITY
Following consummation of the MRA and the MRA Financing, 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 MRA Financing, 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 the Company's
utility property, $529 million of borrowings under the Company's senior bank
facility, $20 million of unsecured medium term notes and $3,272 million of
senior unsecured notes to be issued pursuant to the MRA Financing. The Company
also will have available additional borrowings of $275 million under the senior
bank facility and, under the financial covenants set forth in the indenture with
respect to the notes, will have the ability to incur additional indebtedness, up
to certain limitations. See "Capitalization", "Selected Historical and Pro Forma
Financial Data", "The MRA" and "The PowerChoice Agreement".
The degree to which the Company is leveraged could have important
consequences including: (i) the Company's ability to obtain additional financing
for working capital, capital expenditures, acquisitions, other corporate
purposes or other purposes will be limited in the future; (ii) a substantial
portion of the Company's cash flow from operations will be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available to the Company for other purposes; and (iii) the Company's
substantial leverage may place the Company at a competitive disadvantage, hinder
its ability to adjust rapidly to changing market conditions and make it more
vulnerable in the event of a downturn in general economic conditions or its
business. As a result, any reduction in revenues or significant increase in
costs or expenditures could materially adversely affect the Company's ability to
satisfy its obligations. See "Management's Discussion and Analysis 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 certain 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
54
<PAGE>
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, the
affected customers and competitors may challenge the Company's right to collect
these fees, or the appropriate level of these fees. There can be no assurance
that the Company would prevail in any such proceeding. If revenues are
significantly lower than those anticipated in its rate design, the Company's
ability to service its obligations 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 requests for future rate
increases even if the Company successfully proves revenue shortfalls or
increased expenses. In addition, many aspects of the Company's operations,
including its electric transmission and distribution operations, 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. Suspension of the PowerChoice Agreement or
renegotiation of its material terms could have a material adverse effect on the
Company's results of operations and on the cash available to service its
obligations. See "Certain Litigation with Respect to the MRA."
FEDERAL INCOME TAX IMPLICATIONS OF MRA TO THE COMPANY
The Company has requested rulings from the Internal Revenue Service to the
effect that the amount of cash and Common Stock paid to the IPP Parties who are
terminating their PPAs upon closing of the MRA will be currently deductible and
generate a substantial NOL. No assurance can be given that favorable rulings
will be issued. If favorable rulings are not received, and the Company's claimed
current deductions are challenged on audit and not ultimately sustained, the
amount of tax refunds generated from the NOL carryback, and thus the amount of
cash available to repay its 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 Company's stock. For purposes of making the change in ownership computation,
the IPP Parties who acquire Company stock pursuant to the MRA will likely be
considered a separate 5% shareholder group, with the result that a stock
ownership change of 23% will be deemed to have occurred by reason of their
collective acquisition of such stock. Thus, if the
55
<PAGE>
IPP Parties 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 in the
taxable years following such change in ownership would likely be significantly
lower than the NOL amount which otherwise would be usable absent the limitation.
Consequently, the Company's net cash position could be significantly lower as a
result of tax liabilities which would otherwise be eliminated or reduced through
unrestricted use of the NOL.
LIMITATIONS ON DIVIDENDS; DEPRESSED EARNINGS
The Indenture to be entered into with respect to the Notes will contain
limitations of the amount of dividends payable with respect to the Common Stock.
The Company's ability to issue dividends is also limited by the PowerChoice
Agreement. In addition, because of the ten year amortization of the MRA
Regulatory Asset described in the "Pro Forma Condensed Financial Statements",
earnings will be substantially depressed for at least five years.
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 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
this asset is 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. Depending on
when SFAS No. 71 was required to be discontinued, such charge would likely be
material to the Company's reported financial condition and results of operations
and the Company's ability to pay common and preferred dividends.
CERTAIN LITIGATION WITH RESPECT TO THE MRA
In April 1998, Norcen Energy Resources, Ltd. ("Norcen") sued three IPPs that
are parties to the MRA and the Company. The claim against the Company relates to
certain rights of Norcen to sue if the Company breached its PPAs with the three
projects and alleges tortious interference by the Company with Norcen's gas
purchase agreements. In May 1998, such projects announced that they had entered
into a settlement agreement with Norcen in which Norcen agreed to release the
Company from its claims upon the closing of the MRA.
In April 1998, the cities of Oswego, Fulton, Cohoes and the New York
Conference of Mayors and Municipal Officials sought a temporary restraining
order and preliminary injunction in New York State Supreme Court against the PSC
to enjoin the implementation of the PowerChoice settlement, the MRA and the
Company's contemplated auction of its fossil and hydro generation assets on the
grounds that the PSC failed to comply with the provisions of the State
Environmental Quality Review Act. They were joined in their petition by the
chairman of the Buffalo City Council Energy Committee. The application of the
City of Oswego and the other petitioners for the temporary restraining order was
denied at a Supreme Court hearing held in Albany on April 21, 1998. On May 8,
1998, there were oral arguments heard in the Supreme Court in Albany and the
court did not grant the cities' request for preliminary injunction but rather
reserved ruling on all of the cities' requests. In addition, the City of Oswego
and others petitioned the PSC for rehearing of the March 20, 1990 order
approving PowerChoice. See "Conditions to the Consummation of the MRA."
56
<PAGE>
CONDITIONS TO THE CONSUMMATION OF THE MRA
The Company's obligation to consummate the MRA with respect to each IPP
Party is subject to (i) the representations and warranties of such IPP being
true in all material respects, (ii) such IPP having complied in all material
respects with its agreements in the MRA, (iii) the Company having received all
necessary regulatory approvals, which approvals shall be in full force and
effect and either be final and non-appealable or not subject to the possibility
of appeal, review or reconsideration which, in the opinion of the Company, is
reasonably likely to be successful and if successful, would have a material
adverse effect on the Company, (iv) consummation of the MRA and the transactions
contemplated thereby not being restrained, enjoined or otherwise prohibited by a
court or a governmental authority, (v) no claim, action, suit, investigation or
other proceeding being pending which in the opinion of the Company is reasonably
likely to be successful and which, if adversely determined, is reasonably likely
to have a material adverse effect on the Company, (vi) the Company receiving
satisfactory releases from all third party agreements with lenders, suppliers
and other third parties that the Company has entered into at the request or on
behalf of an IPP Party, or in lieu thereof, receipt of a satisfactory indemnity
from an IPP Party, (vii) appropriate releases from the IPP Parties with respect
to the litigation enumerated in the MRA, (viii) approval by the Company's
shareholders of Proposal 2 and (ix) the consummation of the MRA Financing on
terms reasonably satisfactory to the Company. Each IPP's obligation to
consummate the MRA is subject to comparable conditions, other than (vi), (viii)
and (ix), in addition to the conditions that since September 30, 1996, there
shall not have been any event or condition (other than the impact of the
existing PPAs and the MRA) which has a material adverse effect on the Company
and the shelf registration with respect to the shares of Common Stock being
issued pursuant to the MRA becoming effective.
COMPANY PROSPECTS IF THE MRA IS NOT CONSUMMATED
If the MRA is not consummated, it is anticipated that the Board of Directors
will reconsider all alternatives then available to the Company to address the
Company's financial condition and regulatory situation and to satisfy the best
interest of all shareholders. These alternatives may include the renegotiation
of the terms of the MRA, the sale of the generation assets of the Company and
other efforts to increase liquidity and a request for higher rates. However,
because of the prolonged efforts exerted by all parties, resulting in
concessions by each that were difficult to achieve, no assurance can be given
that a substitute arrangement between the Company and the IPP Parties or the PSC
could be readily negotiated. Further, the Board of Directors has concluded that
the other alternatives available to the Company are not likely to be in the best
interests of Shareholders when compared to the MRA. See "Board Recommendation".
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PROPOSAL NO. 3: COMMON STOCK AMENDMENT
- --------------------------------------------------------------------------------
The Board of Directors has also approved an amendment to Article IV of its
amended certificate of incorporation to increase the number of shares of Common
Stock which the Company is authorized to issue from 185 million to 250 million
(the "Common Stock Amendment") to provide a number of authorized shares of
Common Stock sufficient to implement the MRA and to preserve flexibility to
issue additional shares of Common Stock, of which an aggregate of approximately
144.5 million were issued and outstanding on the Record Date. If the
transactions contemplated by the MRA are consummated, the Company will issue a
total of approximately 42.9 million new shares of Common Stock to the IPP
Parties in connection with the MRA, thereby increasing the total number of
issued and outstanding shares to approximately 187.5 million. The total number
of shares of Common Stock issued or reserved for issuance will be approximately
187.7 million, which is approximately 2.7 million shares more than the Company
is currently authorized to issue. In addition, the Board of Directors believes
it to be in the best interests of the Company to authorize the issuance of
additional shares of Common Stock in order to preserve flexibility for the
Company to issue additional shares of Common Stock, as the need may arise, in
the raising of additional capital for the reduction of debt, for necessary or
desirable additions to the
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Company's electric system and for other corporate purposes. The Board of
Directors considers it prudent to increase the number of shares which the
Company shall have authority to issue to assure that the Company has the
flexibility to meet its financial needs in the future.
The Board of Directors considers it to be in the best interests of the
Company to have, after the consummation of the MRA, shares of Common Stock of
the Company authorized and available for issuance without further action by the
shareholders, unless such shareholder action is required by application law or
the rules of any national securities exchange on which the Company's securities
may be listed. The Board of Directors believes it advisable to authorize
additional shares of Common Stock now so that if an issuance of such shares is
determined to be appropriate in the future, it could be accomplished without the
delay and expense involved in obtaining shareholder approval. However, the
Company would be required to obtained authorization of the PSC prior to the
issuance of any additional shares of Common Stock.
In the event Proposal 2 is approved but Proposal 3 is not approved, the
Company anticipates it will attempt to renegotiate the terms of the MRA by
decreasing the number of shares of Common Stock and increasing the cash payable
to the IPP Parties, although there can be no assurance that such renegotiation
will occur, or to acquire shares of Common Stock in the market or in privately
negotiated transactions to use for part of the MRA consideration.
If the Common Stock Amendment is approved, shareholders will have no
preemptive rights with respect to the additional shares of Common Stock. Such
shares will be issued on such terms, at such times and on such conditions as the
Board of Directors may determine without further action by shareholders. The
Board of Directors has neither entered into any negotiations, agreements, or
understandings, nor made any other determinations, with respect to the issuance
of any shares of such Common Stock.
While not submitted for approval as such, the Common Stock Amendment may be
considered an "anti-takeover" device. In the event of any attempted takeover of
the Company through tender offer, merger, proxy contest or otherwise, the
additional shares could be used to dilute the stock ownership of the hostile
takeover party or could be acquired by purchasers who might assist the Board of
Directors in opposing a hostile takeover bid. Moreover, the availability of such
additional shares in and of itself might have the effect of discouraging an
attempt to acquire control of the Company other than through negotiations with
the Board of Directors. The Company presently has charter or by-law provisions
which provide for a staggered board of directors, removal of directors only for
cause, advance notice of shareholder proposals and nominations, a "fair-price"
provision concerning second step transactions by interested shareholders, no
cumulative voting, and no right of shareholders to call special meetings. Under
New York law, the Company's common shareholders are not permitted to act by less
than unanimous written consent. In addition, Section 912 of the New York
Business Corporation Law (the "BCL") applies to Niagara Mohawk and would also
apply to Holdings following implementation of the holding company proposal.
Section 912 prohibits a "business combination" (as defined in Section 912,
generally including mergers, sales and leases of assets, issurances of
securities and similar transactions) by a company or its subsidiary with an
interested stockholder" (as defined in Section 912, generally the beneficial
owner of 20 percent or more of the company's voting stock) within five years
after the person or entity becomes an interested stockholder, unless prior to
the person or entity becoming an interested stockholder, the business
combination or the transaction pursuant to which the person or entity became an
interested stockholder is approved by the company's board of directors. After
five years, the business combination may be consummated only if approved by the
holders of a majority of the outstanding stock of the company entitled to vote
thereon, excluding shares held by the interested stockholder, at a meeting
called for the purpose, or pursuant to a stringent "fair price" formula. Except
as set forth under Proposal 3, the Company has no plans to adopt any measures
other than the Common Stock Amendment which may be deemed "anti-takeover"
measures. See "Proposal 4: Comparative Shareholders' Rights."
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THE BOARD OF DIRECTORS RECOMMENDS THAT THE HOLDERS OF COMMON STOCK VOTE IN
FAVOR OF APPROVAL OF PROPOSAL NO. 3.
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PROPOSAL 4: HOLDING COMPANY AND ADOPTION OF THE EXCHANGE AGREEMENT
- --------------------------------------------------------------------------------
The Board of Directors of Niagara Mohawk unanimously believes that it is in
the best interests of Niagara Mohawk and its shareholders to restructure Niagara
Mohawk so that it will become a separate subsidiary of a new parent holding
company, with the present holders of Common Stock becoming the holders of the
common stock of the new parent.
To carry out such restructuring, Niagara Mohawk has caused to be
incorporated a New York corporation, Holdings, which now has a nominal amount of
stock outstanding and no present business or properties of its own. All of the
currently outstanding shares of Holdings common stock, are owned by Niagara
Mohawk.
The Board of Directors of each of Niagara Mohawk and Holdings has adopted
the Exchange Agreement under which, subject to adoption by Niagara Mohawk's
shareholders and the satisfaction of other conditions, Niagara Mohawk will
become a subsidiary of Holdings through the exchange of the outstanding shares
of Niagara Mohawk Common Stock on a share-for-share basis for shares of Holdings
common stock (referred to in this Prospectus/Proxy Statement as the "share
exchange" or the "exchange"). Following the share exchange, certain of Niagara
Mohawk's existing subsidiaries involved in non-utility operations will be
transferred to Holdings and become subsidiaries of Holdings. See "--The Share
Exchange--Transfer of Niagara Mohawk's Non-Utility Subsidiaries to Holdings".
The Exchange Agreement is attached to this Prospectus/Proxy Statement as Exhibit
A and is incorporated herein by reference.
Niagara Mohawk is subject to regulation by the PSC under the New York Public
Service Law (the "Public Service Law"). The PowerChoice Agreement approved the
holding company restructuring and the terms with which Niagara Mohawk and
Holdings have agreed to comply in their on-going relationships and activities.
REASONS FOR THE HOLDING COMPANY STRUCTURE AND SHARE EXCHANGE
GENERAL
The proposed holding company structure is intended to provide Niagara Mohawk
and its subsidiaries with the financial and regulatory flexibility to compete
more effectively in an increasingly competitive energy industry by providing a
structure that can accommodate both regulated and unregulated lines of business.
Niagara Mohawk currently operates under the regulatory constraints of the PSC
that were generally designed to discourage electric utilities from participating
in unregulated businesses and that limit (i) the total amount of the incremental
investment in its unregulated operations, (ii) the amount that can be invested
annually, (iii) the cumulative amount that can be invested in any single line of
business and (iv) the debt-equity ratios of its subsidiaries. Under current
regulations, any time Niagara Mohawk wishes to allocate funds to new unregulated
ventures, it must seek PSC approval. The approval process itself leads to long
delays, forces the Company to reveal its plans to competitors, and gives
competitors the opportunity to intervene in the regulatory approval process and
attempt to gain competitive advantage by seeking restrictions that would
handicap Niagara Mohawk.
The holding company structure proposed here largely would eliminate many of
these regulatory constraints that would otherwise severely limit or handicap
Niagara Mohawk's ability to participate in unregulated business opportunities as
the industry evolves. In approving PowerChoice, the PSC has given the Company 12
months in which to form a holding company.
The holding company structure is a well-established form of organization for
companies conducting multiple lines of business. It is a common form of
organization for unregulated companies and for those regulated companies, such
as telephone utilities and water utilities, which are not subject to the Holding
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Company Act. In addition, it is utilized by many electric companies which are
involved in unregulated activities. In recognition of the increased competition
in the electric utility industry, the 1992 Energy Policy Act permits electric
utilities to conduct certain business activities which were previously limited
by the Holding Company Act. Niagara Mohawk wishes to take advantage of this
opportunity, and desires to do so by utilizing the most efficient and effective
corporate structure.
More generally, the holding company structure will enable Holdings to engage
in unregulated businesses without obtaining the prior approval of the PSC,
thereby enabling Holdings to pursue unregulated business opportunities in a
timely manner. Under the new corporate structure financing of unregulated
activities of Holdings and its non-utility subsidiaries will not require PSC
approval. In addition, the capital structure of each non-utility subsidiary may
be appropriately tailored to suit its individual business. Also, under the
holding company structure, Holdings would not need PSC approval to issue debt or
equity securities to finance the acquisition of the stock or assets of other
companies. The ability to raise capital for acquisitions without prior PSC
approval should allow competition on a level basis with other potential
acquirors, some of which are already holding companies. Under a holding company
structure, the issuance of debt or equity securities by Holdings to finance the
acquisition of the stock or assets of another company should not adversely
affect Niagara Mohawk's capital devoted to and available for regulated utility
operations.
The holding company structure separates the operations of regulated and
unregulated businesses. As a result, it provides a better structure for
regulators to assure that there is no cross-subsidization of costs or transfer
of business risk from unregulated to regulated lines of business. A holding
company structure also is preferred by the investment community because it makes
it easier to analyze and value individual lines of business. Moreover, the use
of a holding company structure provides legal protection against the imposition
of liability on regulated utilities for the results of unregulated business
activities. In short, the holding company structure is a highly desirable form
of conducting regulated and unregulated businesses within the same corporate
group.
As discussed below under "--The Share Exchange--Transfer of Niagara Mohawk's
Non-Utility Subsidiaries to Holdings," as part of the holding company
restructuring, certain of the current non-utility subsidiaries of Niagara Mohawk
will be transferred to and become, or become owned through, separate
subsidiaries of Holdings following the share exchange. Niagara Mohawk needs the
financial and regulatory flexibility provided by this holding company structure
to operate in a changing environment and successfully address the new levels of
competition.
Opportunities in the new competitive environment could take many forms,
including joint ventures and strategic alliances in addition to direct
investments in new businesses. All of these opportunities will be easier to
pursue under a holding company structure than they would be under the current
structure.
Strategic alliances with unregulated third party participants and/or
diversification into unrelated fields may also help protect against the market
and financial risks to which Niagara Mohawk is now, and increasingly will be,
exposed. Thus, Holdings may wish to increase its investment in unregulated
energy-related businesses, whether through additional "ground floor" investment,
the acquisition of existing energy and energy services providers, or the
formation of strategic alliances with industry partners.
Holdings will continue to seek to invest in the current lines of business
and, through its subsidiaries, will engage in energy marketing and other
energy-related activities. Although Holdings has not identified other specific
business opportunities, it believes that such activities would likely include
areas with which Niagara Mohawk is already familiar, such as information
systems, environmental services, engineering services, financial services, meter
reading, and billing and collection services. Under a holding company structure,
Holdings should be able to take advantage of opportunities in a timely fashion
and compete more effectively against other energy companies. Except for the
restrictions set forth in the PowerChoice Agreement and discussed in "--The
Share Exchange--The PowerChoice Agreement", Holdings believes it should not
otherwise be required to obtain PSC approval for investments in non-utility
businesses, would
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not be subject to the limitations imposed under certain provisions of New York
law applicable to Niagara Mohawk, and thus should be able to compete more
effectively against other entities not subject to similar constraints.
Given its financial condition and contractual restrictions, the Company does
not foresee Holdings making substantial investments in unregulated businesses in
the near future. However, under the terms of the PowerChoice Agreement, Niagara
Mohawk has a one-year window in which it can adopt the holding company
structure.
CERTAIN CONSIDERATIONS
FUTURE PERFORMANCE OF HOLDINGS COMMON STOCK CANNOT BE ASSURED. The purpose
of the share exchange is to establish a holding company structure that will
enhance the ability to take advantage of business opportunities outside of
Niagara Mohawk's present markets. The Board of Directors believes the share
exchange and holding company structure to be in the best interests of Niagara
Mohawk and its shareholders. Nevertheless, the success of Holdings in realizing
its goals and the future performance of Holdings common stock cannot be assured.
DIVIDENDS ON HOLDINGS COMMON STOCK WILL INITIALLY DEPEND ON COMMON STOCK
DIVIDENDS PAID BY NIAGARA MOHAWK. Holdings does not now, nor will it
immediately after the share exchange, conduct directly any business operations
from which it will derive any revenues. Holdings plans to obtain funds for its
own operations from dividends paid to Holdings by its subsidiaries, and from
sales of securities or debt incurred by Holdings. Dividends on Holdings common
stock will initially depend upon the earnings, financial condition and capital
requirements of Niagara Mohawk, and the dividends that Niagara Mohawk pays to
Holdings. Niagara Mohawk suspended the common stock dividend in 1996 to help
stabilize its financial condition. In making future dividend decisions with
respect to Niagara Mohawk or Holdings, the applicable board would evaluate,
along with standard business considerations, the entity's financial condition,
contractual and regulatory restrictions, competitive pressure on prices,
available cash flow and retained earnings and other strategic considerations. In
the future, dividends from Holdings' subsidiaries other than Niagara Mohawk may
also be a source of funds for dividend payments by Holdings. Payment of Niagara
Mohawk dividends to Holdings will be subject to the prior rights of holders of
Niagara Mohawk preferred stock, First Mortgage Bonds and other long-term debt.
In addition, although it has no present intention to do so, Niagara Mohawk may
issue additional preferred stock in the future to meet its capital requirements.
Such additional preferred stock will also have preferential dividend rights.
The PowerChoice Agreement also imposes the following limitations on the
dividends that Niagara Mohawk may pay to Holdings after the share exchange: net
income available for common dividends plus in each of the following years: 1998:
$50 million, 1999: $75 million, 2000, 2001 and 2002: $100 million, 2003: $80
million, 2004: $60 million, 2005: $40 million, 2006: $20 million, thereafter:
$0. If the Company files a rate case for any year from 2003 to 2007, this
dividend limitation will be reassessed in the rate filing. The Indenture to be
entered into with respect to the Senior Notes will also contain limitations of
the amount of dividends payable with respect to the Common Stock.
NON-UTILITY BUSINESSES WILL NOT BE AVAILABLE AS SOURCES FOR DIVIDENDS ON
NIAGARA MOHAWK PREFERRED STOCK. Following consummation of the share exchange,
certain of Niagara Mohawk's non-utility subsidiaries will be transferred to
Holdings, and will not be available to the holders of Niagara Mohawk preferred
stock as a source of cash for the payment of dividends or other amounts.
NON-UTILITY BUSINESSES. Niagara Mohawk's principal non-utility subsidiaries
that will be transferred to Holdings participate in energy marketing and
brokering, energy services, Canadian electricity generation and distribution.
It is the current intention of Holdings for these non-utility subsidiaries
to engage primarily in energy-related businesses which will not be regulated by
state or federal agencies which regulate public utilities.
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Such businesses may encounter competitive and other factors not previously
experienced by Niagara Mohawk, and may have different, and perhaps greater,
investment risks than those involved in the regulated utility business of
Niagara Mohawk. There can be no assurance that such businesses will be
successful or, if unsuccessful, that they will not have a direct or indirect
adverse effect on Holdings. As is the case now, any losses incurred by such
businesses will not be recoverable in utility rates of Niagara Mohawk. As
Holdings engages in more such business activities, the market price of Holdings'
stock will be affected to a lesser extent by the performance of Niagara Mohawk.
Comparable earnings from Niagara Mohawk's unregulated businesses were $(4.7)
million, or (3.3) cents per share in 1997, $23.2 million, or 16.1 cents per
share in 1996, and $10.3 million, or 7.1 cents per share in 1995.
Niagara Mohawk's total investment in these businesses, computed in
accordance with PSC specifications as a percentage of consolidated
capitalization, was 2.5%, 2.6% and 2.1% as of December 31, 1997, 1996 and 1995,
respectively.
Holdings will obtain funds to invest in non-utility subsidiaries and other
businesses from dividends it receives from Niagara Mohawk, borrowings and other
financings, and dividends Holdings may in the future receive from any
non-utility subsidiaries. There can be no assurance that non-utility
subsidiaries will have earnings or pay any dividends to Holdings in the
foreseeable future.
IMPLEMENTATION OF THE RATE PLAN. The new rate plan contained in the
PowerChoice Agreement will take effect upon the closing of the MRA and will
continue to govern utility rates and charges of Niagara Mohawk even if common
shareholders of Niagara Mohawk do not approve the holding company proposal and
adopt the Exchange Agreement. In that event, Niagara Mohawk will not be able to
realize the benefits it expects from a holding company structure, which Niagara
Mohawk believes is important in the future deregulated competitive environment
of the energy industry. See also "--The Share Exchange--The PowerChoice
Agreement" below.
CERTAIN RESTRICTIONS IN THE PSC ORDER. As summarized above, the PowerChoice
Agreement imposes certain limitations on the dividends that Niagara Mohawk may
pay to Holdings after the share exchange. See also "--The Share
Exchange--Dividend Policy". The PowerChoice Agreement also contains restrictions
on transactions between Niagara Mohawk and Holdings or any other subsidiary of
Holdings, loans, guarantees or pledges by Niagara Mohawk for the benefit of
Holdings or any other subsidiary of Holdings, and Board and managerial
interlocks between Niagara Mohawk and Holdings or any other subsidiary of
Holdings. See "--The Share Exchange--Regulatory Approvals" and
"--Management--Restriction on Board and Management Interlocks between Holdings
and Niagara Mohawk". There can be no assurance as to the effect, if any, that
such restrictions will have on the business or operations of Holdings, Niagara
Mohawk or the non-utility subsidiaries.
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A. THE SHARE EXCHANGE
EXCHANGE AGREEMENT
The Exchange Agreement has been unanimously adopted by the Boards of
Directors of Niagara Mohawk and Holdings and is subject to adoption by the
holders of at least two-thirds of the outstanding shares of Niagara Mohawk
Common Stock. See "--Vote Required" below. In the share exchange:
(1) each share of Niagara Mohawk Common Stock outstanding immediately prior
to the effective time of the share exchange will be exchanged for one new
share of Holdings common stock;
(2) Holdings will become the owner of all outstanding Niagara Mohawk Common
Stock; and
(3) the shares of Holdings common stock held by Niagara Mohawk immediately
prior to the share exchange will be canceled.
As a result, upon completion of the share exchange, Holdings will become a
holding company, Niagara Mohawk 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 Niagara Mohawk Common Stock outstanding
immediately prior to the share exchange. Following the share exchange, certain
of Niagara Mohawk's existing non-utility subsidiaries will be transferred to
Holdings and become subsidiaries of Holdings. See "--Transfer of Niagara
Mohawk's Non-Utility Subsidiaries to Holdings". The Exchange Agreement is
attached to this Prospectus/Proxy Statement as Exhibit A and is incorporated
herein by reference.
Niagara Mohawk's outstanding preferred stock will not be exchanged in the
share exchange but will continue as shares of Niagara Mohawk preferred stock.
The share exchange will not change the rights of the holders of such shares as
currently provided in Niagara Mohawk's Amended Certificate of Incorporation.
Debt of Niagara Mohawk will remain unchanged and will continue as outstanding
obligations of Niagara Mohawk after the share exchange.
REGULATORY APPROVALS
FEDERAL POWER ACT
The FERC has held that the transfer of common stock of a public utility
company, such as the Company, from its existing stockholders to a holding
company in a transaction such as the share exchange constitutes a transfer of
the "ownership and control" of the facilities of such utility, and is thus a
"disposition of facilities" subject to FERC review and approval under Section
203 of the Federal Power Act. The Company will apply for such approval and for
approval of the transfer of certain power sales contracts and a tariff
associated with certain of its generation assets.
ATOMIC ENERGY ACT
A provision in the Atomic Energy Act requires Nuclear Regulatory Commission
("NRC") consent for the transfer of control of NRC licenses. The NRC Staff has
in the past asserted that this provision applies to the creation of a holding
company over an NRC-licensed utility company in a transaction such as the share
exchange. The Company will apply for NRC approval under the Atomic Energy Act
for the transfer of control resulting from the Share Exchange of its two
licenses, for Nine Mile Point 1 and Nine Mile Point 2, respectively.
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
The Company is currently exempt from the Public Utility Holding Company Act
of 1935 (the "35 Act") under Section 3(a)(2) thereof. Holdings will own 100% of
the common stock of the Company, majority interests in Beebee Island Corporation
and Moreau Manufacturing Corporation and 50% of CNP, all of which are public
utility companies for purposes of the 35 Act. Section 9(a)(2) of the 35Act
requires
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the prior approval of the SEC under Section 10 of the 35 Act for any person to
become an affiliate of more than one public utility company. Holdings will apply
for such approval. Holdings will also apply to the Commission for an order
exempting Holdings from all provisions of the Holding Company Act, except
Section 9(a)(2) thereof, pursuant to the exemption provided by Section 3(a)(1)
thereof. The basis for such exemption is that the holding company, and every
subsidiary company thereof which is a public-utility company from which the
holding company derives any material part of its income, are predominantly
intrastate in character and are organized in the same state.
PUBLIC SERVICE LAW
The New York Public Service Law ("NYPSL") requires approval from the PSC in
order to undertake the reorganization represented by the formation of the
holding company structure. The NYPSL also requires PSC approval for a holding
company to acquire the stock of a utility pursuant to a share exchange. The
Company has obtained PSC approval of the holding company concept and will make
appropriate additional filings with respect to the formation of a holding
company.
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
Niagara Mohawk 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 Niagara Mohawk,
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. Niagara Mohawk cannot
predict when all conditions will be satisfied, but expects that the share
exchange will become effective in the first quarter of calendar 1999.
EXCHANGE OF STOCK CERTIFICATES
If the share exchange is effected, it will not be necessary for holders of
Niagara Mohawk Common Stock to physically exchange their existing stock
certificates for certificates of Holdings common stock. The certificates which
represent shares of Niagara Mohawk Common Stock outstanding immediately prior to
the effective time of the share exchange will automatically represent an equal
number of shares of Holdings common stock immediately after the effective time
and will no longer represent Niagara Mohawk Common Stock. New certificates
bearing the name of Holdings will be issued after the share exchange, if and as
certificates representing shares of Niagara Mohawk Common Stock outstanding
immediately prior to the share exchange are presented for exchange or transfer.
Niagara Mohawk preferred stock will not be exchanged but will continue as
shares of Niagara Mohawk preferred stock. The share exchange will not change the
rights of the holders of such shares as provided in Niagara Mohawk's Amended
Certificate of Incorporation. Debt of Niagara Mohawk will remain unchanged and
will continue as outstanding obligations of Niagara Mohawk after the share
exchange.
TRANSFER OF NIAGARA MOHAWK'S NON-UTILITY SUBSIDIARIES TO HOLDINGS
Other than for the transfer of the subsidiaries described under "Certain
Considerations--Non-Utility Businesses" and other de minimis non-utility
investments, and except for dividends or other distributions with respect to
Niagara Mohawk Common Stock held by Holdings, it is expected that Niagara Mohawk
will
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not transfer at less than a fair consideration any of its other assets to
Holdings or any Holdings subsidiaries. Niagara Mohawk will develop accounting
and other procedures to the extent determined to be necessary or appropriate to
insure separation of utility and non-utility businesses. See "--The PowerChoice
Agreement" below.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Shares of Niagara Mohawk Common Stock held in its Dividend Reinvestment and
Common Stock Purchase Plan (including uncertificated whole and fractional
shares) will automatically become a like number of shares of Holdings common
stock at the effective time of the share exchange. At the effective time,
Holdings will succeed to the Plan as in effect immediately prior to the
effective time, and shares of Holdings common stock will be issued under the
Plan on and after the effective time. Holdings will file a post-effective
amendment to Niagara Mohawk's registration statement on Form S-3 for the Plan
shortly after the effective time of the exchange.
AMENDMENT OR TERMINATION OF THE EXCHANGE AGREEMENT
The Boards of Directors of Niagara Mohawk and Holdings may amend any of the
terms of the Exchange Agreement at any time before or after its adoption by the
holders of Niagara Mohawk Common Stock and prior to the effective time, but no
such amendment may, in the sole judgment of the Board of Directors of Niagara
Mohawk, materially and adversely affect the rights of Niagara Mohawk's
shareholders.
The Exchange Agreement may be terminated and the share exchange abandoned at
any time before or after the shareholders of Niagara Mohawk adopt the Exchange
Agreement, and prior to the effective time, if the Board of Directors of Niagara
Mohawk determines, in its sole judgment, that consummation of the exchange
would, for any reason, be inadvisable or not be in the best interests of Niagara
Mohawk or its shareholders.
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 Niagara Mohawk Common Stock. Following the
share exchange, Niagara Mohawk 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.
NIAGARA MOHAWK COMMON STOCK MARKET PRICES AND DIVIDENDS
Niagara Mohawk 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
Niagara Mohawk Common Stock for the fiscal
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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 18, 1998)........................................... 13 11
</TABLE>
The closing price of Niagara Mohawk Common Stock on May 18, 1998 was
reported to have been $12 3/16.
DIVIDEND POLICY
Holdings does not now, nor will it immediately after the share exchange,
conduct directly any business operations from which it will derive any revenues.
Holdings plans to obtain funds for its own operations from dividends paid to
Holdings on the stock of its subsidiaries, and from sales of securities or debt
incurred by Holdings. Dividends on Holdings common stock will initially depend
upon the earnings, financial condition and capital requirements of Niagara
Mohawk, and the dividends paid by Niagara Mohawk to Holdings. In the future,
dividends from Holdings' subsidiaries other than Niagara Mohawk may also be a
source of funds for dividend payments by Holdings. Payment of dividends on
Niagara Mohawk Common Stock will continue to be subject to the prior rights of
holders of Niagara Mohawk preferred stock. Niagara Mohawk suspended the common
stock dividend in 1996 to help stabilize its financial condition. In making
future dividend decisions with respect to Niagara Mohawk or Holdings, the
applicable board would evaluate, along with standard business considerations,
the entity's financial condition, contractual restrictions and regulatory
restrictions, competitive pressure on prices, available cash flow and retained
earnings and other strategic considerations.
In addition, as set forth above under "Certain Considerations", the
PowerChoice Agreement contains restrictions on the dividends Niagara Mohawk can
pay Holdings. See "Considerations--Dividends on Holdings Common Stock Will
Initially Depend on Common Stock Dividends Paid by Niagara Mohawk".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Niagara Mohawk and Holdings have received advice from Bryan Cave LLP, their
special tax counsel, that the principal federal income tax consequences of the
share exchange are as summarized below.
Tax Implications to Niagara Mohawk Shareholders. Under section 351 of the
Code, no gain or loss will be recognized by a holder of Niagara Mohawk Common
Stock as a result of the exchange of such holder's Niagara Mohawk Common Stock
solely for Holdings common stock. The tax basis of the Holdings common stock
received in the share exchange will be the same as the exchanging shareholder's
basis in the Niagara Mohawk Common Stock surrendered. The holding period of the
Holdings common stock received
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by each exchanging shareholder will include the holding period during which such
shareholder held the Niagara Mohawk Common Stock surrendered, provided that such
stock was held as a capital asset on the date of the share exchange. No federal
income tax consequences will result from the share exchange to holders of
Niagara Mohawk preferred stock in respect of such stock.
Tax Implications to Niagara Mohawk and Holdings. No gain or loss will be
recognized by Niagara Mohawk or Holdings as a result of the share exchange. The
basis of the Niagara Mohawk Common Stock received by Holdings will be the same
as the aggregate tax basis that the holders of Niagara Mohawk Common Stock had
in such stock immediately prior to the share exchange. Holdings' holding period
in the Niagara Mohawk Common Stock received in the share exchange will include
the period during which such stock was held by the holders of Niagara Mohawk
Common Stock.
Continuation of Affiliated Group. Consummation of the share exchange will
not result in a termination of the existence of the affiliated group of
corporations of which Niagara Mohawk has been the common parent. Niagara Mohawk
will be included in such affiliated group of corporations of which Holdings will
become the new common parent.
Reporting Requirements. Pursuant to applicable Treasury regulations,
shareholders of Niagara Mohawk Common Stock will be required to attach to their
federal income tax returns a complete statement of all facts pertinent to the
share exchange, including the shareholder's basis in the shares of Niagara
Mohawk Common Stock transferred to Holdings and the type, number and value of
shares of Holdings common Stock received in the share exchange. In addition,
such shareholders will be required to keep permanent records of any information
relating to the share exchange that is required to be filed with their income
tax returns.
The Bryan Cave opinion is based on certain factual representations received
from Niagara Mohawk and Holdings, and upon the firm's review and analysis of
relevant and currently applicable Code provisions, Treasury regulations, other
administrative pronouncements and judicial decisions. Such opinion is not
binding upon either the Internal Revenue Service or the courts. Authorities
relied upon in the Bryan Cave opinion could be repealed, revoked or modified,
possibly with retroactive effect, so as to result in federal income tax
consequences different from those indicated.
THE FOREGOING FEDERAL INCOME TAX DISCUSSION IS INTENDED TO PROVIDE ONLY A
GENERAL SUMMARY. IT DOES NOT PURPORT TO ADDRESS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO THE SHARE EXCHANGE, INCLUDING TAX CONSEQUENCES
WHICH MAY VARY DEPENDENT ON THE PARTICULAR CIRCUMSTANCES OR SPECIAL TAX STATUS
OF CERTAIN NIAGARA MOHAWK SHAREHOLDERS. NOR DOES IT, OR THE BRYAN CAVE OPINION,
ADDRESS THE CONSEQUENCES OR EFFECT OF ANY APPLICABLE STATE, LOCAL OR FOREIGN TAX
LAWS, OR ANY ESTATE, INHERITANCE OR GIFT TAX LAWS. EACH HOLDER OF NIAGARA MOHAWK
COMMON STOCK IS STRONGLY URGED TO CONSULT WITH SUCH HOLDER'S OWN TAX ADVISOR
REGARDING FEDERAL OR OTHER POSSIBLE TAX CONSEQUENCES ARISING OUT OF THAT
HOLDER'S PARTICIPATION IN THE SHARE EXCHANGE.
NIAGARA MOHAWK EMPLOYEE PLANS
The Exchange Agreement provides that Niagara Mohawk's Employee Savings Fund
Plans for Represented and Non-Represented Employees, Dividend Reinvestment and
Common Stock Purchase Plan and 1992 Stock Option Plan (together, the "Niagara
Mohawk Stock Plans"), along with other employee benefit plans maintained by
Niagara Mohawk (collectively with the Niagara Mohawk Stock Plans, the "Niagara
Mohawk Employee Plans"), such as the pension plans, health plans and disability
plans, will be amended to provide for Holdings taking over responsibility for
such Plans upon consummation of the share exchange. The Niagara Mohawk 1992
Stock Option Plan (the "Option Plan") was previously approved by Niagara Mohawk
shareholders.
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STOCK BASED PLANS
If the share exchange is consummated, shares of Niagara Mohawk Common Stock
then held under the Niagara Mohawk Stock Plans will automatically become a like
number of shares of Holdings common stock.
Upon consummation of the share exchange, all outstanding stock options under
Niagara Mohawk's Option Plan will be converted into options to acquire, on the
same terms and conditions as were applicable under such stock options
immediately prior to the share exchange, such number of shares of Holdings
common stock as the holders of such options would have been entitled to receive
pursuant to the share exchange had such holders exercised such stock options in
full immediately prior to the share exchange, at a price per share of Holdings
common stock equal to the per share option price of Niagara Mohawk Common Stock.
Also, a vote in favor of the share exchange will also constitute approval, under
the Option Plan, as then amended, for shares of Holdings common stock, instead
of Niagara Mohawk Common Stock, to be issued and delivered in the future under
such Plan. Holdings may issue future options on its common stock under such
Plan. In addition, performance shares granted and to be granted under such Plan
will be treated in a comparable manner. Holdings will file post-effective
amendments to Niagara Mohawk's registration statements on Form S-8 for the
amended Niagara Mohawk Stock Plans shortly after the effective time of the share
exchange.
NON-STOCK BASED PLANS
Upon consummation of the share exchange, Holdings will take over
responsibility for all of Niagara Mohawk's retirement and other employee benefit
plans, such as the pension plans, health plans and disability plans. Benefits
provided for in these non-stock based plans will not be changed as a result of
the holding company restructuring and share exchange.
TREATMENT OF NIAGARA MOHAWK PREFERRED STOCK
Shares of Niagara Mohawk preferred stock will not be exchanged in the share
exchange but will continue as shares of preferred stock of Niagara Mohawk.
Therefore, holders of Niagara Mohawk preferred stock will not become holders of
Holdings preferred or common stock as a result of the share exchange. Except as
discussed under this caption, the share exchange and the holding company
structure will not change the rights of holders of the outstanding shares of
Niagara Mohawk preferred stock. Niagara Mohawk preferred stock will continue to
rank senior to Niagara Mohawk Common Stock as to dividends and as to the
distribution of Niagara Mohawk's assets upon any liquidation.
The restructuring is not expected to affect adversely the holders of Niagara
Mohawk preferred stock. Dividends on Niagara Mohawk preferred stock will
continue to be paid as before, depending upon the earnings, financial condition
and other relevant factors affecting Niagara Mohawk. However, the assets or
earnings of Holdings' subsidiaries other than Niagara Mohawk will not be
available to pay dividends on Niagara Mohawk preferred stock or to make
distributions with respect to such preferred stock in the event of a liquidation
if the share exchange is consummated. See "--Transfer of Niagara Mohawk's
Non-Utility Subsidiaries to Holdings" above. Appraisal rights under the New York
Business Corporation Law are not available to holders of Niagara Mohawk
preferred stock inasmuch as that preferred stock is not being exchanged for
Holdings stock and will continue as Niagara Mohawk preferred stock after the
holding company restructuring.
After the share exchange, Niagara Mohawk will continue to be subject to the
periodic reporting requirements of the Securities Exchange Act of 1934.
The Board of Directors considered the effects on the holders of the Niagara
Mohawk Common Stock and the holders of Niagara Mohawk preferred stock in
determining that the share exchange should only involve the Niagara Mohawk
Common Stock. The Board's decision to exchange Niagara Mohawk
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Common Stock for Holdings common stock was primarily based on the Board's desire
to confer the expected benefits of the share exchange on those investors who are
best placed to enjoy such benefits, namely the holders of Niagara Mohawk Common
Stock. Even if the Niagara Mohawk preferred stock were to be exchanged for
preferred stock of Holdings, investors in such preferred stock would continue to
receive fixed dividend payments in respect of their investment. The expected
benefits of the share exchange include those discussed above, such as increased
flexibility in operating Holdings' unregulated businesses and enhanced ability
to take advantage of the new business opportunities in a timely manner. The
Board's decision not to exchange Niagara Mohawk preferred stock in the share
exchange was primarily based on the Board's desire not to alter, or potentially
alter, the nature of the investment decision represented by the Niagara Mohawk
preferred stock (namely, a direct investment in a regulated utility) and the
priority position of the holders of Niagara Mohawk preferred stock with respect
to dividends and assets on liquidation. As to holders of Niagara Mohawk
preferred stock, the benefits of continuing as investors in Niagara Mohawk's
regulated utility business outweigh any loss of access to the return on future
investments made by the unregulated businesses of Holdings. In that regard,
investors in priority position securities, such as the holders of Niagara Mohawk
preferred stock, benefit to the extent that such securities have been issued by
the corporate entity that holds directly and/or has unrestricted access to the
principal assets of the enterprise. As discussed above under the caption
"Certain Considerations", the funds required to pay dividends on Holdings common
stock for a period of time following the share exchange are expected to be
derived predominately from dividends paid by Niagara Mohawk. If the Niagara
Mohawk preferred stock also were to be exchanged pursuant to the share exchange
and become preferred stock of Holdings, the funds required to pay dividends on
that preferred stock would also be derived predominately from dividends paid by
Niagara Mohawk. Although it has no present intention to do so, it is expected
that Niagara Mohawk may need to issue preferred stock in the future to meet its
capital requirements. The preferred stock that would be issued by Niagara Mohawk
would have preference over the Common Stock as to the payment of dividends and,
therefore, would reduce the amount of funds available to Niagara Mohawk for the
payment of dividends to Holdings. As a result, the conversion of the Niagara
Mohawk preferred stock to Holdings preferred stock would result in the dividend
payments and distributions upon liquidation with respect to those shares being
subordinated to the dividend and distribution rights of any newly created
preferred stock of Niagara Mohawk.
TREATMENT OF NIAGARA MOHAWK DEBT, ASSETS AND LIABILITIES, AND BUSINESS
The current indebtedness of Niagara Mohawk will continue to be obligations
of Niagara Mohawk and will be neither assumed nor guaranteed by Holdings in
connection with the share exchange. Niagara Mohawk's first mortgage bonds will
continue to be secured by first mortgage liens on all of the properties of
Niagara Mohawk that are currently subject to such liens. Such indebtedness will
be neither assumed nor guaranteed by Holdings in connection with the share
exchange. The decision to have the indebtedness of Niagara Mohawk continue as
obligations of Niagara Mohawk is based upon a desire not to alter, or
potentially alter, the nature of the investment represented by such fixed income
obligations, namely a direct investment in a regulated utility.
The consolidated assets and liabilities of Niagara Mohawk and its
subsidiaries immediately before the Effective Time will be the same as the
consolidated assets and liabilities of Holdings and its subsidiaries immediately
after the Effective Time. All the business and operations conducted immediately
before the Effective Time by Niagara Mohawk and its subsidiaries will continue
to be conducted immediately after the Effective Time by Niagara Mohawk and such
subsidiaries as subsidiaries of Holdings.
HOLDINGS CAPITAL STOCK
Holdings' certificate of incorporation and by-laws will govern certain
rights of Holdings' shareholders after the share exchange as discussed under
this caption and under "--Comparative Shareholders' Rights" below.
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The following statements with respect to Holdings common stock are based on
certain provisions of Holdings' certificate of incorporation and by-laws and on
New York law. Holdings' certificate of incorporation is attached as Exhibit B
hereto and is incorporated herein by reference and Holdings' by-laws are
attached as Exhibit C hereto and are incorporated herein by reference.
Holdings is authorized to issue 300,000,000 shares of common stock and
50,000,000 shares of preferred stock. Holdings preferred stock may be issued
from time to time in series as Holdings' Board of Directors may determine, and
the respective dividend rates, redemption terms (if any), amounts payable on
liquidation, voting rights (if any), number of votes per share, conversion
rights (if any), and other terms will be fixed by Holdings' Board of Directors
with respect to any such series prior to issuance.
When issued in the share exchange, shares of Holdings common stock will be
fully paid and nonassessable. Holders of Holdings common stock and preferred
stock are not entitled to preemptive rights.
DIVIDENDS
Subject to prior rights of Holdings preferred stock (if any should become
outstanding), Holdings common stock is entitled to such dividends as may be
declared by Holdings' Board of Directors, and Holdings may purchase or otherwise
acquire outstanding shares of common stock, out of funds legally available
therefor.
As noted above, the PowerChoice Agreement and the terms of Niagara Mohawk's
debt imposes certain limitations on the dividends that Niagara Mohawk may pay to
Holdings after the share exchange. At least initially after the exchange,
dividends on Holdings common stock will depend on dividends paid by Niagara
Mohawk on its Common Stock owned by Holdings.
LIQUIDATION RIGHTS
Upon liquidation of Holdings, any net assets remaining after payment to the
holders (if any) of Holdings preferred stock of the full amounts to which they
are entitled to receive are distributable pro rata to the holders of Holdings
common stock.
VOTING RIGHTS
Holders of Holdings common stock are entitled to one vote per share. There
are no cumulative voting rights. Holdings' Board of Directors is divided into
three classes, with directors elected generally to serve for terms of three
years.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Holdings common stock will be The Bank
of New York of New York, NY.
INDEMNIFICATION AND LIMITATION OF LIABILITY
As do the Niagara Mohawk By-Laws, the Holdings by-laws will provide that
Holdings shall indemnify to the full extent permitted by law any person made, or
threatened to be made, a party to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person or such person's testator or intestate is or was a director, officer or
employee of Holdings, or serves or served at the request of Holdings with any
other enterprise as a director, officer or employee; expenses incurred by any
such person in defending any such action, suit or proceeding will be paid or
reimbursed by Holdings promptly upon receipt by it of an undertaking of such
person to repay such expenses if it shall ultimately be determined that such
person is not entitled to be indemnified by Holdings. No amendment of
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this by-law provision will impair the rights of any person arising at any time
with respect to events occurring prior to such amendment.
As does Niagara Mohawk's Certificate of Incorporation, Holdings' certificate
of incorporation provides that a director shall not be personally liable to
Holdings or its shareholders for damages for any breach of duty in such
capacity, except to the extent that such exemption is not permitted under the
BCL (presently, such exemption is not permitted for acts or omissions in bad
faith or involving intentional misconduct or a knowing violation of law, or if
the director personally gained in fact a financial profit or other advantage to
which the director was not legally entitled or if such act violated Section 719
of the BCL). Any amendment, modification or repeal of such liability limitation
provision may not apply to or have any effect on the liability or alleged
liability of any director for or with respect to any acts or omissions of such
director occurring prior to such amendment, modification or repeal.
POSSIBLE EFFECT OF CERTAIN HOLDINGS PROVISIONS AND THE BCL
It is not the intention of the Board of Directors to discourage legitimate
offers to enhance shareholder value. However, certain provisions of Holdings'
certificate of incorporation and by-laws may have the effect of discouraging
unilateral tender offers or other attempts to take over and acquire the business
of Holdings. These provisions, all of which are already contained in Niagara
Mohawk's Certificate of Incorporation or By-Laws or otherwise apply to Niagara
Mohawk, might discourage a potentially interested purchaser from attempting a
unilateral takeover bid for Holdings on terms which some shareholders might
favor. If they discourage potential takeover bids, these provisions might limit
the opportunity for Holdings' shareholders to sell their shares at a premium
over then prevailing market prices.
NON-CUMULATIVE VOTING. Neither Niagara Mohawk nor Holdings provides for
cumulative voting in the election of directors. The procedure known as
cumulative voting permits shareholders to multiply the number of votes to which
they may be entitled by the total number of directors to be elected in the same
election by the holders of the class or classes of shares of which their shares
are a part and to cast their whole number of votes for one candidate or to
distribute them among any two or more candidates.
Under cumulative voting, it is possible for representation on the Board of
Directors to be obtained by an individual or group of individuals who own less
than a majority of the voting stock. Such a shareholder or group may have
interests and goals which are not consistent with, and indeed might be in
conflict with, those of a majority of the shareholders. The Board of Directors
believes that each director should represent all shareholders, rather than the
interests of any special constituency, and that the presence on Holdings' Board
of one or more directors representing such a constituency could disrupt and
impair the efficient management of Holdings. The lack of cumulative voting could
discourage the accumulation of blocks of Holdings common stock and therefore
could tend to make temporary increases in the market price of Holdings common
stock, which could result therefrom, less likely to occur. Therefore, in these
limited instances, shareholders may not be able to sell their shares of Holdings
common stock at a market price temporarily influenced by this type of activity.
ADVANCE NOTICE OF BUSINESS TO BE BROUGHT BEFORE SHAREHOLDER MEETINGS. As
under Niagara Mohawk's By-Laws, under Holdings' by-laws shareholders must
provide Holdings prior written notice of any business to be brought before an
annual or special meeting (including the nomination of directors) in order for
it to be considered. With respect to any annual meeting, such by-laws require
the written notice to be received by the Secretary of Holdings no earlier than
90 days nor later than 60 days prior to the date of the annual meeting, except
that if the date of the annual meeting is first publicly announced less than 70
days prior to the date of the meeting, such by-laws require the written notice
to be received by the Secretary of Holdings not more than 10 days after such
public announcement. These by-law provisions provide a more orderly procedure
for conducting shareholder meetings and provide the Board of Directors with a
meaningful opportunity prior to shareholder meetings to inform shareholders, to
the extent deemed necessary or desirable by the Board of Directors, of any
business proposed to be conducted at such meetings, together
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with any recommendation of the Board of Directors. Also, by requiring advance
notice of nominations by shareholders, these by-law provisions afford the Board
of Directors a meaningful opportunity to consider the qualifications of the
proposed nominees and, to the extent deemed necessary or desirable by the Board
of Directors, to inform shareholders about such qualifications.
On the other hand, these by-law provisions may provide sufficient time for
Holdings to institute litigation or take other steps to respond to such
business, or to prevent such business from being acted upon, if such response or
prevention is thought to be necessary or desirable. With respect to the election
of directors, these by-law provisions may tend to inhibit shareholders who do
not have any intention of controlling Holdings or its Board of Directors from
participating in the nomination process; such provisions may also provide
sufficient time for Holdings to institute litigation or take other steps to
prevent the nominee from being elected or serving if such prevention is thought
to be necessary or desirable.
"BLANK-CHECK" PREFERRED STOCK. Holdings' certificate of incorporation will
authorize the issuance of 50,000,000 shares of Holdings preferred stock. In
addition, after giving effect to the share exchange, approximately 113 million
shares of Holdings common stock will be authorized but unissued and not reserved
for issuance. An effect of the existence of unissued Holdings common stock and
preferred stock may be to enable the Holdings Board of Directors to render more
difficult or discourage a transaction to obtain control of Holdings. Such shares
might be issued by the Board of Directors without shareholder approval in
transactions that might prevent or render more difficult or costly the
completion of a takeover transaction, as by diluting voting or other rights of
the proposed acquiror. In this regard, Holdings' certificate of incorporation
(as does Niagara Mohawk's) will grant the Board of Directors broad power to
establish the rights and preferences of the authorized and unissued preferred
stock, one or more classes or series of which could be issued entitling holders
to vote separately as a class on any proposed merger or consolidation, to
convert such stock into shares of Holdings common stock or possibly other
securities, to demand redemption at a specified price under prescribed
circumstances related to a change of control, or to exercise other rights
designed to impede a takeover.
SECTION 912 OF THE NEW YORK BUSINESS CORPORATION LAW. Section 912 of the
BCL would prohibit a "business combination" (as defined in Section 912,
generally including mergers, sales and leases of assets, issuances of securities
and similar transactions) by Holdings or a subsidiary with an "interested
shareholder" (as defined in Section 912, generally the beneficial owner of 20
percent or more of Holdings' voting stock) within five years after the person or
entity becomes an interested shareholder, unless (i) prior to the person or
entity becoming an interested shareholder, the business combination or the
transaction pursuant to which such person or entity became an interested
shareholder shall have been approved by Holdings' Board of Directors, or (ii)
the business combination is approved by the holders of a majority of the
outstanding voting stock of Holdings, excluding shares held by the interested
shareholder, at a meeting called for such purpose not earlier than five years
after such interested shareholder's stock acquisition date.
SECTION 70 OF THE NEW YORK PUBLIC SERVICE LAW. Under Section 70 of the
Public Service Law, unless authorized by the PSC, no gas corporation or electric
corporation may directly or indirectly acquire the stock or bonds of any other
corporation incorporated for, or engaged in, the same or a similar business, or
proposing to operate or operating under a franchise from New York State or any
other state or any other municipality. In general, no stock corporation other
than a gas corporation or electric corporation or street railroad corporation
may purchase or acquire, take or hold, more than ten percent (10%) of the voting
capital stock of any gas corporation or electric corporation organized or
existing under or by virtue of the laws of New York unless with the consent of,
and subject to the terms and conditions set by, the PSC. No consent may be given
by the PSC to any such acquisition unless it has been shown that such
acquisition is in the public interest. Any contract, assignment, transfer or
agreement for transfer of any stock in violation of Section 70 will be void and
of no effect, and no such transfer or assignment may be made upon the books of
any such gas corporation or electric corporation, or will be recognized as
effective for any purpose. An
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"electric corporation" is defined to generally include any corporation, company,
partnership and person owning, operating or managing any electric plant for use
by others than itself and its tenants, or except where electricity is generated
solely from co-generation, small buyers or alternative energy production
facilities or distributed from such facilities to users located near such a
facility.
OTHER PROVISIONS. Some other provisions of Holdings' certificate of
incorporation and by-laws may also tend to discourage potential offers to take
over and acquire the business of Holdings. Holdings' Board of Directors will be
divided into three classes, with directors in each class generally being elected
to serve a three-year term. Also, special shareholder meetings may be called
only by the chairman of the Board of Directors or by the Board pursuant to a
resolution adopted by a majority of the entire Board. Holdings' certificate of
incorporation also provides that directors may not be removed without cause by
the shareholders, except in the case of a director elected by the holders of any
class or series of stock (other than Holdings common stock), voting as a class
or series, when so entitled by the applicable provisions of Holdings'
certificate of incorporation. Finally, certain provisions (relating to, for
example, limitation on director liabilities, the ability to call special
meetings of shareholders, presiding at meetings of shareholders, classified
Board of Directors, election and removal of directors, advance notice
requirements for shareholder proposals and nomination of directors at
shareholder meetings, and indemnification) may only be amended by the
affirmative vote of not less than two-thirds of the shares entitled to vote at a
shareholder meeting or, with respect to By-Law amendments effecting such
provisions, two-thirds of the entire Board. Niagara Mohawk's Certificate of
Incorporation and By-Laws presently contain a number of these provisions.
COMPARATIVE SHAREHOLDERS' RIGHTS
Niagara Mohawk and Holdings are both New York corporations. When the share
exchange becomes effective, holders of Niagara Mohawk Common Stock will become
holders of Holdings common stock, and their rights will be governed by Holdings'
certificate of incorporation and by-laws instead of those of Niagara Mohawk.
Certain differences between the rights of holders of Holdings common stock
and those of holders of Niagara Mohawk Common Stock are summarized below. Such
summary is qualified in its entirety by reference to the information included in
the exhibits hereto, in exhibits to the Registration Statement of which this
Prospectus/Proxy Statement is a part, and in materials incorporated herein by
reference.
VOTING REQUIREMENTS FOR SIGNIFICANT TRANSACTIONS. As a result of a recent
change in the BCL, the necessary vote for significant transactions involving
Holdings, such as mergers, consolidations, share exchanges and dissolution, will
be a majority vote, rather than the two-thirds vote applicable to Niagara
Mohawk. The Board of Directors believes this lower vote requirement will
facilitate any transactions deemed to be in the best interests of Holdings and
its shareholders.
PURPOSE CLAUSE. The corporate purposes for which Niagara Mohawk may engage
in business are generally those related to rendering electric or gas service and
related activities. Holdings is authorized to engage in any and all lawful acts
and activities.
AUTHORIZED SHARES. Authorized Holdings and Niagara Mohawk common stock is
300,000,000 and 185,000,000, subject to increase to 250,000,000 shares if
Proposal 3 is adopted, shares, respectively. As of the record date for the
Annual Meeting, there were 144,419,351 shares of Niagara Mohawk Common Stock
issued and outstanding. Up to approximately 187 million shares of Holdings
common stock may be issued in the share exchange. The additional authorized but
unissued shares of Holdings common stock will be available for issuance under
the Dividend Reinvestment and Stock Purchase Plan and the Option Plan, as well
as possibly for stock splits, stock dividends, equity financings, and for other
general corporate purposes (including, possibly, acquisitions) (none of which is
under current consideration).
In addition, as of the record date, there were 3,400,000 shares of
Cumulative Preferred Stock, par value $100 per share, of which 2,322,000 shares
were issued and outstanding, and 19,600,000 shares of
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Cumulative Preferred Stock, par value $25 per share, of which 11,681,204 shares
were issued and outstanding. There will be 50,000,000 authorized shares of
Holdings preferred stock, all of which are unissued.
PREFERRED STOCK. The respective Boards of Directors of Holdings and Niagara
Mohawk are authorized to issue preferred stock in series.
The voting rights and certain preferences of the Niagara Mohawk preferred
stock are determined in Niagara Mohawk's certificate of incorporation. Niagara
Mohawk preferred stock is generally not entitled to vote but only has limited
voting rights as required by law and as set out in the Niagara Mohawk's
certificate of incorporation, which rights generally arise only in the event of
certain arrearages in payment of dividends and certain corporate transactions
affecting Niagara Mohawk preferred stock. Niagara Mohawk preferred stock is
subject to redemption and sinking fund provisions. After the share exchange,
outstanding Niagara Mohawk preferred stock will continue as equity securities of
Niagara Mohawk with the same preferences, designations, relative rights,
privileges and powers, and subject to the same restrictions, limitations and
qualifications, as were applicable to outstanding Niagara Mohawk preferred stock
prior to the share exchange.
Holdings' certificate of incorporation will not establish voting rights,
preferences or other rights with respect to Holdings preferred stock. Holdings'
Board of Directors is given full authority to establish and designate each
particular series of preferred stock and to fix the rights, preferences and
limitations of each particular series, and the relative rights, preferences and
limitations between series, as follows: (i) the serial designation; (ii) the
number of shares in such series; (iii) the dividend rate or rates and the date
or dates upon which such dividends shall be payable; (iv) whether dividends on
such series will be cumulative, and, if so, from which date or dates; (v)
liquidation preferences; (vi) provisions relating to sinking or other similar
funds; (vii) provisions relating to the conversion or exchange of shares of such
series into shares of any class of stock (except that conversion or exchange may
not be made into shares having superior dividend or liquidation preferences);
(viii) the voting rights, if any, in addition to those required by law and the
number of votes per share; and (ix) any other relative rights, preferences or
limitations of such series not inconsistent with the Holdings' certificate of
incorporation or with applicable law.
Management believes that the ability to issue Holdings preferred stock will
provide important flexibility to Holdings.
PAR VALUE. The par value of Holdings preferred stock differs from those of
Niagara Mohawk preferred stocks. A designated par value is not required under
the BCL and in modern corporate practice par value does not serve any useful
purpose. It is anticipated that the difference in par values will not affect the
market value of Holdings preferred stock.
The par value per share of Holdings common stock, $0.01, was reduced from
the $1.00 par value per share of Niagara Mohawk Common Stock to save on filing
fees in New York.
CLASSIFIED BOARD. As is the case with Niagara Mohawk, Holdings' certificate
of incorporation and by-laws will provide (i) for the Board to determine the
number of directors; and (ii) for the division of the Board into three classes
with directors in each class generally being elected for a three-year term. See
"-- Management" below.
OTHER PROVISIONS. Holdings' certificate of incorporation will provide that
directors may not be removed without cause by the shareholders, except in the
case of a director elected by the holders of any class or series of stock (other
than Holdings common stock), voting as a class or series, when so entitled by
the applicable provisions of Holdings' restated certificate of incorporation.
Also, certain provisions (relating to, for example, preferred stock, limitation
on director liabilities, the ability to call special meetings of shareholders,
classified Board of Directors, election and removal of directors, advance notice
requirements for shareholder proposals and nomination of directors at
shareholder meetings) may only be amended by the affirmative vote of not less
than two-thirds of the shares then entitled to vote at shareholder meetings.
Other provisions of Holdings' certificate of incorporation or by-laws may be
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amended, repealed or adopted by a vote of the shareholders of Holdings at the
time entitled to vote at any shareholder meeting or, in the case of the Holdings
by-laws, by the Board of Directors of Holdings.
See also "--Holdings Capital Stock".
BUSINESS
Niagara Mohawk 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. Niagara Mohawk 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. Niagara Mohawk sells, distributes and transports natural gas
in areas of central, northern and eastern New York contained within its electric
service territory having a total population of approximable 1.7 million. Niagara
Mohawk owns or has a significant ownership interest in seven principal fossil
and nuclear electric generating facilities providing it with a total capacity of
approximately 5,299 megawatts of electricity.
Niagara Mohawk's principal non-utility subsidiaries participate in real
estate development of property formerly owned by Niagara Mohawk and
energy-related services. In addition, Niagara Mohawk holds a single-purpose
subsidiary established to facilitate the sale of an undivided interest in a
designated pool of customer receivables. Certain of these subsidiaries will be
transferred to and therefor become separate subsidiaries of Holdings after the
share exchange.
After the share exchange occurs, Holdings will have no material assets other
than its ownership of stock of its subsidiaries, which initially will consist of
all of Niagara Mohawk's outstanding common stock and thereafter the common stock
of certain Niagara Mohawk's existing non-utility subsidiaries. See "-- Transfer
of Niagara Mohawk's Non-Utility Subsidiaries to Holdings". It is expected that,
in the future, Holdings will expand into some other businesses and ventures.
REGULATION OF HOLDINGS AND NIAGARA MOHAWK
REGULATION OF HOLDINGS.
Holdings must comply with the PowerChoice Agreement. As discussed and
referred to above under "--The PowerChoice Agreement", there are restrictions on
transactions between Niagara Mohawk and Holdings and other Holdings
subsidiaries, restrictions on loans, guarantees or pledges for the benefit of
Holdings and other Holdings subsidiaries, and restrictions on Board and
managerial interlocks between Niagara Mohawk and Holdings and other Holdings
subsidiaries.
As a result of the share exchange, Holdings will become a "public utility
holding company" under the Holding Company Act. Though Niagara Mohawk expects to
sell or liquidate its majority interests in two of its generation subsidiaries,
Beebee Island Corporation and Moreau Manufacturing Corporation, Holdings will
retain an indirect 50% interest in CNP which does not contribute a material part
of its income.
In 1994 the SEC issued a release soliciting the views of interested parties
on a study being conducted by its staff to develop recommendations regarding
certain Congressional concerns and the needs of those affected by regulation
under the Holding Company Act. In June 1995 the staff completed its study and
issued a report which concluded that significant changes were needed in the
current regulatory scheme. The SEC staff report viewed the Holding Company Act
as unnecessarily restrictive in many regards which could prevent companies from
responding effectively to changes now occurring in the utility industry. Among
the staff report's recommendations were three legislative options for the SEC to
offer to Congress--repeal of the Holding Company Act with legislation to
continue federal protection of consumers, unconditional repeal of the Holding
Company Act, or a broadening of the SEC's authority to exempt holding companies
where state regulation was adequate. Pending legislative action, the staff
report recommended that the SEC act administratively to modernize and simplify
holding company regulation, reduce delays in current administration, and
minimize regulatory overlap, including rulemaking proposals and significant
changes in the SEC's past interpretations under the Act. One of these proposals
was a
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rule to exempt most energy-related diversification within investment
limitations. Niagara Mohawk cannot predict whether Congress will take any action
to significantly modify or repeal the Holding Company Act, or whether the SEC
will take action to revise or modify significantly its Holding Company Act
rules, decisions and interpretations.
REGULATION OF NIAGARA MOHAWK. Niagara Mohawk will continue to be subject to
regulation by the PSC after the share exchange. Niagara Mohawk's utility retail
sales, which include sales of gas, transportation and balancing services, will
continue to be made primarily under rate schedules and tariffs filed with and
subject to the jurisdiction of the PSC. See "--The PowerChoice Agreement" below.
In addition, Niagara Mohawk will continue to be subject to regulation by the
PSC, as it has been in the past, regarding issuances of securities, capital
ratio maintenance, and the maintenance of its books and records.
Niagara Mohawk also will continue to be subject to regulation by the FERC
and the NRC. FERC will continue to regulate the terms and conditions of Niagara
Mohawk's transmission of electricity, along with transmission interconnections
and ancillary services, as well as the terms and conditions of its sales of
electric energy for resale. FERC will also continue to regulate Niagara Mohawk's
disposition of any capacity on interstate gas pipelines to which it has rights
under firm contracts. The NRC will continue to review and regulate Niagara
Mohawk's operation of the two Nine Mile Point nuclear units.
THE POWERCHOICE AGREEMENT
PROHIBITIONS OF AFFILIATE LOANS, GUARANTEES AND PLEDGES. Under the
PowerChoice Agreement, Niagara Mohawk is prohibited from making loans to, or
providing guarantees or other credit support for the obligations of, Holdings or
any other subsidiary of Holdings. Likewise, Niagara Mohawk may not pledge its
assets for the obligations of any other entity, including Holdings or any other
subsidiary of Holdings.
PROHIBITIONS OF AFFILIATE TRANSACTIONS AND OTHER RESTRICTIONS. The
PowerChoice Agreement generally prohibits any transaction between Niagara Mohawk
and Holdings or any other subsidiary of Holdings, except for the provision of
certain corporate administrative services, certain "grandfathered" transactions
as listed therein, transactions permitted as a matter of generic policy by the
PSC, and tariffed transactions. In addition, Holdings and its subsidiaries are
required by the PowerChoice Agreement to operate as separate entities, and the
PowerChoice Agreement prescribes capital ratio maintenance requirements for
Niagara Mohawk. Finally, the PowerChoice Agreement sets out guidelines for the
allocation of costs among Holdings, Niagara Mohawk and the other subsidiaries of
Holdings.
RESTRICTIONS ON BOARD AND MANAGEMENT INTERLOCKS. In order to address
concerns regarding the possible diversion of the attention of Niagara Mohawk's
management away from the utility business, as well as to avoid potential
conflicts of interest with the management of Holdings, the PowerChoice Agreement
contains restrictions regarding the composition of the Boards and managements of
Niagara Mohawk and Holdings and other subsidiaries of Holdings. See
"--Management--Restrictions on Board and Management Interlocks between Holdings
and Niagara Mohawk".
The PowerChoice Agreement will continue to govern Niagara Mohawk's utility
rates and charges even if common shareholders do not approve the holding company
proposal and adopt the Exchange Agreement at Niagara Mohawk's Annual Meeting. In
that event, Niagara Mohawk will not be able to realize the benefits it expects
from a holding company structure, which it believes is necessary in the future
deregulated competitive environment of the energy industry.
STATUTORY APPRAISAL RIGHTS
Holders of shares of Niagara Mohawk Common Stock are not entitled to
appraisal rights under the BCL as a result of the exchange.
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B. MANAGEMENT
DIRECTORS AND OFFICERS OF HOLDINGS
Holdings' certificate of incorporation and by-laws divides Holdings' Board
of Directors into three classes, which will become effective prior to the share
exchange, with directors in each class generally being elected for a three-year
term. Holdings' by-laws will permit the Board of Directors to fix from time to
time the number of directors, and the Board has fixed its initial size at 3, to
be increased to 14, effective as of the effective time of the share exchange. A
vote in favor of the share exchange will also constitute ratification of the
make-up of Holdings' Board of Directors.
Presently William E. Davis, Albert J. Budney, Jr. and William F. Edwards are
the directors of Holdings. Immediately prior to the effective time of the share
exchange, Mr. Edwards will resign and Niagara Mohawk, as such sole shareholder,
will elect all of the then current Niagara Mohawk directors to the Board of
Holdings in the same classes as they presently serve. As of the effective time
of the share exchange, Mr. Budney will resign from the Board of Niagara Mohawk,
Mr. Davis will serve on the Boards of Directors of both Holdings and Niagara
Mohawk and the remaining Niagara Mohawk directors will be Darlene D. Kerr and
John H. Mueller. After completion of the share exchange, Holdings' Board
vacancies may be filled by action of Holdings' Board of Directors. Holdings also
contemplates amending the certificate of incorporation and by-laws of Niagara
Mohawk following the share exchange to reflect more appropriate provisions for a
subsidiary.
The following individuals are officers of Holdings:
<TABLE>
<S> <C>
William E. Davis Chairman and Chief Executive Officer
Albert J. Budney, Jr. President
William F. Edwards Chief Financial Officer
Kapua A. Rice Secretary
</TABLE>
In addition, prior to the share exchange, Gary J. Lavine will become Chief
Legal Officer and Steven W. Tasker will become Chief Accounting Officer.
For further information concerning persons to become directors or officers
of Holdings, see "Proposal 1: Nomination and Election of Directors--Nominees for
Class I Directors", "--Continuing Class II Directors", "--Continuing Class III
Directors" and "--Security Ownership of Directors and Executive Officers".
RESTRICTIONS ON BOARD AND MANAGEMENT INTERLOCKS BETWEEN HOLDINGS AND NIAGARA
MOHAWK
In order to address concerns regarding the possible diversion of the
attention of Niagara Mohawk's management away from the utility business, as well
as to avoid potential conflicts of interest with the Board and management of
Holdings, the PowerChoice Agreement sets forth the following restrictions
regarding the composition of the managements of Niagara Mohawk and Holdings.
COMPOSITION OF THE BOARDS OF DIRECTORS. Niagara Mohawk's Board of Directors
must include at least a majority of outside directors (i.e., individuals not
employed by Niagara Mohawk, Holdings or any of their unregulated affiliates).
SEPARATION OF EMPLOYEES AND OFFICERS. Niagara Mohawk and the unregulated
subsidiaries of holdings will have separate operating employees and operating
officers. Officers of Holdings may be officers of either Niagara Mohawk or an
unregulated affiliate.
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C. OTHER INFORMATION
VALIDITY OF HOLDINGS COMMON STOCK
The validity of the shares of Holdings common stock to be issued in the
share exchange will be passed upon by Sullivan & Cromwell, general counsel to
Niagara Mohawk and Holdings, 125 Broad Street, New York, New York 10004.
EXPERTS
The consolidated financial statements incorporated by reference herein have
been audited by Price Waterhouse LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
COSTS
The Board of Directors considered the financial cost to Niagara Mohawk of
implementing the share exchange, including the expenses associated with
obtaining required approvals, the costs of this proxy solicitation and the other
expenses incurred in connection with registering the Holdings common stock with
the Commission. In the Board's view, these expenses, although in some cases
significant, are acceptable in light of the benefits to Niagara Mohawk of the
share exchange.
------------------------
NIAGARA MOHAWK'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE HOLDING
COMPANY STRUCTURE AND ADOPTED THE EXCHANGE AGREEMENT, BELIEVES THE HOLDING
COMPANY STRUCTURE AND THE SHARE EXCHANGE TO BE IN THE BEST INTERESTS OF NIAGARA
MOHAWK AND ITS SHAREHOLDERS, AND RECOMMENDS THAT THE HOLDERS OF NIAGARA MOHAWK
COMMON STOCK VOTE "FOR" THE HOLDING COMPANY PROPOSAL AND ADOPTION OF THE
EXCHANGE AGREEMENT AT THE ANNUAL MEETING.
- --------------------------------------------------------------------------------
PROPOSAL 5: SHAREHOLDER PROPOSAL RELATED TO THE CERES PRINCIPLES
- --------------------------------------------------------------------------------
The Benedictine Sisters, Benedictine Resource Center, 530 Bardera Road, San
Antonio, Texas 78228, who own 205 shares of the Company's common stock have
advised the Company that they intend to present the following proposal at the
1998 Annual Meeting of Shareholders. The proposed resolution and supporting
statement are as follows:
"WHEREAS WE BELIEVE: Responsible implementation of a sound, credible
environmental policy increases long-term shareholder value by raising
efficiency, decreasing clean-up costs, reducing litigation, and enhancing
public image and product attractiveness;
Adherence to public standards for environmental performance gives a
company greater public credibility than standards created by industry alone.
For maximum credibility and usefulness, such standards should specifically
meet the concerns of investors and other stakeholders;
Companies are increasingly being expected by investors to do meaningful,
regular, comprehensive and impartial environmental reports. Standardized
environmental reports enable investors to compare performance over time.
They also attract investment from investors seeking companies which are
environmentally responsible and which minimize risk of environmental
liability.
WHEREAS: The Coalition for Environmentally Responsible Economies
(CERES)--which includes shareholders of this Company; public interest
representatives, and environmental experts-- consulted with corporations to
produce the CERES Principles as comprehensive public standards for both
environmental performance and reporting. Scores of companies, including Bank
America, Baxter International, Bethlehem Steel, General Motors, H.B. Fuller,
ITT Industries, Pennsylvania Power and Light, Polaroid, and Sun [Sunoco],
have endorsed these principles to demonstrate their commitment to public
environmental accountability and standardized reporting. Fortune-500
endorsers say that
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benefits of working with CERES are *public credibility; *direct access to
major environmental and shareholder organizations, *leadership in designing
the rapidly advancing standardization of environmental disclosure, and
*measurable value-added for the company's environmental initiatives;
A company endorsing the CERES Principles commits to work toward:
1. Protection of the biosphere
2. Sustainable natural resource use
3. Waste reduction and disposal
4. Energy conservation
5. Risk reduction
6. Safe products/services
7. Environmental restoration
8. Informing the public
9. Management commitment
10. Audits and reports
(Materials on the CERES Principles and CERES Report Form are obtainable from
CERES, 711 Atlantic Avenue, Boston, MA 02110, tel: 617/451-0927; Fax
617/482-2028).
CERES is distinguished from other initiatives for corporate environmental
responsibility, by being (1) a successful model of shareholder relations; (2) a
leader in public accountability through standardized environmental reporting;
and (3) a catalyst for significant and measurable environmental improvement
within firms.
RESOLVED: Shareholders request the Company to endorse the CERES Principles
as a part of its commitment to be publicly accountable for its environmental
impact."
STATEMENT OF SHAREHOLDERS
"Many investors support this resolution. Those sponsoring similar
resolutions at various companies have portfolios totaling $75 billion.
Furthermore, the number of public pension funds and foundations supporting this
resolution increases every year. We believe the CERES Principles exceed the
European Community regulation for voluntary participation in verified and
publicly-reported eco-management and auditing, and that they also exceed the
requirements for ISO 14000.
Your vote FOR this resolution will encourage both scrutiny of our Company's
environmental policies and reports and adherence to goals supported by
management and shareholders alike. We believe the CERES Principles will protect
both your investment and your environment."
BOARD OF DIRECTORS' RESPONSES TO THE SHAREHOLDER PROPOSAL
In 1991, the Company adopted a Corporate Policy on Protection of the
Environment which articulates the Company's proactive approach toward
environmental issues. The environmental policy takes the Company beyond mere
compliance with the law. In addition, its comprehensive environmental management
system has helped the Company stay in the forefront of progress toward an
environmentally sustainable energy future.
Since adopting its policy in 1991, the Company has comprehensively measured
and reported on its environmental performance and has engaged in benchmarking
its environmental program against corporate programs both within and outside of
the utility industry. Such benchmarking has consistently shown that the Company
has a leading-edge environmental program. In addition, the Company has been
recognized by a number of governmental and environmental organizations for its
environmental achievements, including its proactive response to global warming,
its leadership in establishing environmental performance indices for the utility
industry, and other advanced environmental management practices.
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Consistent with its policy of going beyond compliance, during 1997 the
Company became the first utility in the U.S. to voluntarily undertake and
achieve full certification of all its fossil and nuclear generating plants with
the newly adopted International Standard for Corporate Environmental Management
known as ISO 14001. The certification process included a rigorous independent
audit which assessed the generating plants' full conformance to the Standard,
including effective implementation of the Company's environmental policies,
pollution prevention, performance measurement, and other "best practices".
Given its track record of dealing successfully with environmental issues
under its own Corporate policy, the Company carefully reviewed the CERES
Principles and does not believe that adopting the CERES Principles in lieu of or
in addition to the Corporation's existing environmental policy and programs
would help the Company better fulfill its continuing commitment to environmental
excellence. The Company believes that its environmental program provides the
most specific and focused approach to ensure that the Company is in compliance
with all applicable environmental regulations and to position itself as a
recognized leader for its environmental achievements.
THEREFORE, THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE AGAINST PROPOSAL
NO. 5.
- --------------------------------------------------------------------------------
PROPOSAL 6: SHAREHOLDER PROPOSAL RELATED TO EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Edward S. George, 89 Corning Hill, Glenmont, New York 12077, who owns 5,000
shares of the Company's Common Stock, has advised the Company that he intends to
present the following proposal at the 1998 Annual Meeting of Shareholders:
"Whereas the dividend is the first casualty in any economic downturn and
the stockholder is the first casualty and the last to benefit from an
upturn, be it
Resolved: That when a dividend is cut, it is recommended that, with
respect to future contract obligations, no salaries will be increased or any
stock options allowed to executives or directors until the dividend is
restored to its original amount before the cut."
STATEMENT OF SHAREHOLDER
"The bullet must be large enough to enable the executives and directors as
well as the stockholders to get their teeth on it.
The administration will maintain that the increases in salary and stock
options are necessary to attract and hold good people. This cliche belongs with
the one 'The check is in the mail', the New York State Legislature and certain
elected officials to justify an increase in their salaries, and 'I'm from the
government and I'm here to help."'
BOARD OF DIRECTORS' RESPONSE TO THE SHAREHOLDER PROPOSAL
As previously stated in the Company's 1997 proxy statement, the suspension
of dividend payments on the common stock was taken to help stabilize the
Company's financial condition and provide flexibility as the Company addresses
growing pressure from the PPAs and weaker sales. While we recognize the
unfavorable effect it has had on our shareholders, the Company believes that the
shareholders' long-term financial interests would not be served by basing
compensation decisions on dividend payment levels.
The Company and the Compensation and Succession Committee of the Board of
Directors have made decisions regarding the compensation of officers and other
employees which we believe are appropriate to the circumstances the Company
faces. The Compensation and Succession Committee's Report on Executive
Compensation, which appears earlier in this Proxy Statement, describes the
decisions that have been made regarding the structure and administration of the
officer compensation program, including a freeze on salary increases during 1996
and 1997. These decisions will ensure the Company's
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ability to maintain a group of qualified officers, in an increasingly
competitive industry, and will directly relate the payment of a significant
component of their total compensation to the future value of our stock and our
shareholders' investment. Adoption of a rigid, inflexible rule like that
proposed by Dr. George could harm the stockholders by making retention of
qualified executives difficult, if not impossible.
THEREFORE, THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE AGAINST PROPOSAL
NO 6.
OTHER MATTERS
- --------------------------------------------------------------------------------
Management does not know of any matters to be presented for action at the
Annual Meeting other than those listed in the Notice of Meeting and referred to
herein. If any other matters properly come before the Annual Meeting, it is
intended that the proxy solicited hereby will be voted in accordance with the
recommendations of the Board of Directors.
SHAREHOLDERS WHO CANNOT BE PRESENT AT THE ANNUAL MEETING ARE REQUIRED TO
FILL OUT, DATE, SIGN AND PROMPTLY RETURN THE ACCOMPANYING FORM OF PROXY IN THE
ENCLOSED ENVELOPE.
DEADLINE FOR SHAREHOLDER PROPOSALS
In order to be included in Holdings' proxy statement and form of proxy
relating to its 1999 Annual Meeting (if common shareholders adopt the Exchange
Agreement and the share exchange occurs) or in Niagara Mohawk's 1999 Annual
Meeting proxy statement and form of proxy (if the Exchange Agreement is not
adopted by common shareholders), proposals from shareholders to be presented at
the 1999 Annual Meeting must be received by the Secretary of Holdings or Niagara
Mohawk, as the case may be, at 300 Erie Boulevard West, Syracuse, New York
13202, no later than December 9, 1998.
Matters intended to be presented by holders of Holdings or Niagara Mohawk
Common Stock, as the case may be, at the 1998 Annual Meeting must be stated in
writing, and delivered to the appropriate Secretary by such shareholders during
the period between 90 and 60 days prior to the date of the meeting.
If Niagara Mohawk common shareholders adopt the Exchange Agreement and the
share exchange occurs, Niagara Mohawk will no longer be publicly held and
Holdings will be the sole owner of Niagara Mohawk Common Stock after the share
exchange. In such event, there will be no regularly scheduled meetings of
shareholders of Niagara Mohawk in 1999 or thereafter.
ADDITIONAL INFORMATION
Niagara Mohawk's annual report on Form 10-K to the SEC, which includes
additional information concerning Niagara Mohawk, its subsidiaries and their
operations and financial condition, is incorporated by reference in this
Prospectus/Proxy Statement. This report, except for exhibits, will be furnished
at no cost to shareholders upon written request to the Secretary, Niagara Mohawk
Power Corporation, 300 Erie Boulevard West, Syracuse, New York 13202.
The directors and officers of the Company and its subsidiaries are insured
against obligations which may be incurred as a result of the Company's
indemnification of its directors and officers. The coverage also insures the
directors and officers against liabilities for which they may not be indemnified
by the Company or its subsidiaries, except a dishonest act or breach of trust.
The insurance was purchased from the National Union Fire Insurance Company,
Associated Electric & Gas Insurance Services, Ltd., Aetna Casualty and Surety
Company, Federal Insurance Company, CNA Insurance Company and ACE Insurance
Company, Ltd. for the term from January 31, 1998 to January 30, 1999 for an
aggregate premium of $1,169,480.
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INDEPENDENT ACCOUNTANTS
The Company has selected the independent accounting firm of Price Waterhouse
LLP to examine the financial statements of the Company and its subsidiaries for
the year ended December 31, 1998. Representatives of Price Waterhouse LLP will
be present at the meeting with the opportunity to make a statement if they
desire to do so and will be available to respond to appropriate questions.
QUARTERLY REPORTS
Shareholders who are NOT RECEIVING quarterly reports DIRECTLY FROM THE
COMPANY and who would like to receive the Company's quarterly reports may write
to Investor Relations, Niagara Mohawk Power Corporation, 300 Erie Boulevard
West, Building C-3, Syracuse, New York 13202-7904 to be included on the
Company's mailing list.
WHERE YOU CAN FIND MORE INFORMATION
Niagara Mohawk files annual, quarterly and special reports, proxy statements
and other information with the SEC. After the share exchange, both Niagara
Mohawk and Holdings will do so. You may read and copy any reports, statements or
other information Niagara Mohawk has filed or Holdings will file at the SEC's
public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
public reference rooms in New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
Our SEC filings are also available to the public from commercial document
retrieval services and at the Internet web site maintained by the SEC at
"http:// www.sec.gov."
Holdings has filed a Registration Statement on Form S-4 to register with the
SEC the shares of Holdings common stock to be issued in the share exchange. This
Prospectus/Proxy Statement is a part of that Registration Statement and
constitutes a prospectus of Holdings in addition to being a proxy statement of
Niagara Mohawk for the Annual Meeting. As permitted by SEC rules, this
Prospectus/Proxy Statement does not contain all the information you can find in
the Registration Statement or in its exhibits.
The SEC allows us to "incorporate by reference" information into this
Prospectus/Proxy Statement, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
Prospectus/Proxy Statement, except for any information superseded by information
in this Prospectus/ Proxy Statement. This Prospectus/Proxy Statement
incorporates by reference the document set forth below that was previously filed
with the SEC (File No. 1-2987). Such document contains important information
about Niagara Mohawk, its subsidiaries and their operations and financial
condition.
1. Annual Report on Form 10-K for the year ended December 31, 1997.
2. Quarterly Report on Form 10-Q for the period ended March 31, 1998.
We are also incorporating by reference additional documents that we may file
with the SEC between the date of this Prospectus/Proxy Statement and the Annual
Meeting.
------------------------
Niagara Mohawk has not authorized anyone to provide you with information
that is different from what is contained in this Prospectus/Proxy Statement.
Neither the delivery of this Prospectus/Proxy Statement nor any distribution of
shares of Holdings common stock shall, under any circumstances, create any
implication that there has not been any change in the affairs of Niagara Mohawk
or Holdings since the respective dates as of which information is given. This
Prospectus/Proxy Statement does not constitute an offer to sell or a
solicitation of an offer to buy shares of Holdings common stock by any person in
any jurisdiction or in any circumstance in which such offer would be unlawful.
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EXHIBIT A
AGREEMENT AND PLAN OF EXCHANGE
This AGREEMENT AND PLAN OF EXCHANGE (the "Agreement"), dated as of May 14,
1998, is between Niagara Mohawk Power Corporation, a New York corporation and
the corporation whose shares of Common Stock, par value $1.00 per share, will be
acquired pursuant to the "Exchange" provided for in this Agreement (the "Subject
Corporation"), and Niagara Mohawk Holdings, Inc., a New York corporation and the
corporation which will acquire the foregoing shares of Common Stock of the
Subject Corporation (the "Acquiring Corporation"). The Subject Corporation and
the Acquiring Corporation are hereinafter referred to, collectively, as the
"Corporations".
WITNESSETH:
WHEREAS, the authorized capital of the Subject Corporation is
$1,215,000,000, consisting of (a) 185,000,000 shares of Common Stock, par value
$1.00 per share ("Subject Corporation Common Stock"), of which 144,419,351
shares are issued and outstanding (which number of issued and outstanding shares
is subject to change prior to the Effective Time (as hereinafter defined) of the
Exchange pursuant to the Dividend Reinvestment and Common Stock Purchase Plan
("DRIP") and the Employee Savings Fund Plans for Represented and Non-Represented
Employees (each an "Employee Plan" and collectively the "Employee Plans") of the
Subject Corporation and the issuance of Subject Corporation Common Stock
pursuant to the Master Restructuring Agreement of the Subject Corporation, dated
as of July 9, 1998, as amended, (b) 3,400,000 shares of Cumulative Preferred
Stock, par value $100 per share ("Subject Corporation $100 Preferred Stock"), of
which 2,322,000 shares are issued and outstanding, (c) 19,600,000 shares of
Cumulative Preferred Stock, par value $25 per share ("Subject Corporation $25
Preferred Stock"), of which 11,681,204 shares are issued and outstanding and (d)
8,000,000 shares of Preference Stock, par value $25 per share ("Preference
Stock"), no shares of which are outstanding.
WHEREAS, the Acquiring Corporation is a wholly-owned subsidiary of the
Subject Corporation with authorized capital stock consisting of 300,000,000
shares of Common Stock, par value $0.01 per share ("Acquiring Corporation Common
Stock"), of which 100 shares are issued and outstanding and owned by the Subject
Corporation;
WHEREAS, the Boards of Directors of the Corporations deem it desirable and
in the best interests of the Corporations and the shareholders of the Subject
Corporation that, at the Effective Time, (a) the Acquiring Corporation acquire
and become the owner and holder of each share of Subject Corporation Common
Stock issued and outstanding at the Effective Time, (b) each share of Subject
Corporation Common Stock issued and outstanding immediately prior to the
Effective Time be automatically exchanged for one share of Acquiring Corporation
Common Stock, and (c) each holder of shares of Subject Corporation Common Stock
issued and outstanding immediately prior to the Effective Time becomes the
holder of a like number of shares of Acquiring Corporation Common Stock, all on
the terms and conditions hereinafter set forth; and
WHEREAS, the Boards of Directors of the Corporations have each approved and
adopted this Agreement, and the Board of Directors of the Subject Corporation
has recommended that the shareholders of the Subject Corporation approve and
adopt the Exchange and this Agreement pursuant to Section 913 of the New York
Business Corporation Law (the "BCL").
NOW, THEREFORE, the Corporations hereby agree as follows:
ARTICLE I
The Exchange and this Agreement shall be submitted to the holders of Subject
Corporation Common Stock for approval and adoption as provided by Section 913 of
the BCL. The affirmative vote of the
A-1
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holders of at least two-thirds of the issued and outstanding Subject Corporation
Common Stock shall be necessary to approve and adopt the Exchange and this
Agreement.
ARTICLE II
Subject to the terms and conditions of this Agreement, the Exchange shall
become effective immediately following the close of business on the date of
filing with the New York Department of State (the "Department of State") of a
certificate of exchange pursuant to Section 913(d) of the BCL ("Certificate"),
or at such later time and date as may be stated in the Certificate (the time and
date at and on which the Exchange becomes effective being referred to herein as
the "Effective Time").
ARTICLE III
A. At the Effective Time:
(1) each share of Subject Corporation Common Stock issued and
outstanding immediately prior to the Effective Time shall be automatically
exchanged for one share of Acquiring Corporation Common Stock, which shares
shall be fully paid and nonassessable by the Acquiring Corporation;
(2) the Acquiring Corporation shall acquire and become the owner and
holder of each issued and outstanding share of Subject Corporation Common
Stock so exchanged;
(3) each share of Acquiring Corporation Common Stock issued and
outstanding immediately prior to the Effective Time shall be cancelled and
shall thereupon constitute an authorized and unissued share of Acquiring
Corporation Common Stock;
(4) each share of Subject Corporation Common Stock held under the DRIP
or an Employee Plan (including fractional and uncertificated shares)
immediately prior to the Effective Time shall be automatically exchanged for
a like number of shares (including fractional and uncertificated shares) of
Acquiring Corporation Common Stock, which shares shall be held under and
pursuant to the DRIP or be issued under such Employee Plan, as the case may
be, as hereinafter provided;
(5) each unexpired and unexercised option to purchase Subject
Corporation Common Stock ("Subject Corporation Stock Option") under the 1992
Stock Option Plan (the "Option Plan"), whether vested or unvested, will be
automatically converted into an option (a "Substitute Option") to purchase a
number of shares of Acquiring Corporation Common Stock equal to the number
of shares of Subject Corporation Common Stock that could have been purchased
immediately prior to the Effective Time (assuming full vesting) under such
Subject Corporation Stock Option, at a price per share of Acquiring
Corporation Common Stock equal to the per share option exercise price
specified in such Subject Corporation Stock Option. In accordance with
Section 424(a) of the Internal Revenue Code of 1986, as amended, each
Substitute Option shall provide the option holder with rights and benefits
that are no less and no more favorable to him than were provided under the
Subject Corporation Stock Option; and
(6) the former holders of Subject Corporation Common Stock shall be
entitled only to receive shares of Acquiring Corporation Common Stock in
exchange therefor as provided in this Agreement.
B. Shares of Subject Corporation $100 Preferred Stock, Subject Corporation
$25 Preferred Stock and Subject Corporation Preference Stock shall not be
exchanged or otherwise affected by or in connection with the Exchange. Each
share of Subject Corporation $100 Preferred Stock issued and outstanding
immediately prior to the Effective Time shall continue to be issued and
outstanding following the Exchange and shall continue to be one share of Subject
Corporation $100 Preferred Stock of the applicable series designation. Each
share of Subject Corporation $25 Preferred Stock issued and outstanding
immediately prior to the Effective Time shall continue to be issued and
outstanding following the
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Exchange and shall continue to be one share of Subject Corporation $25 Preferred
Stock of the applicable series designation.
C. As of the Effective Time, the Acquiring Corporation shall succeed to the
DRIP as in effect immediately prior to the Effective Time, and the DRIP shall be
appropriately modified to provide for the issuance or delivery of Acquiring
Corporation Common Stock on and after the Effective Time pursuant thereto.
D. As of the Effective Time, (1) the Employee Plans shall be appropriately
amended to provide for the issuance or delivery of Acquiring Corporation Common
Stock, and the Acquiring Corporation shall agree to issue or deliver Acquiring
Corporation Common Stock, and (2) the Option Plan shall also be appropriately
amended to provide for the issuance of options by the Acquiring Corporation to
purchase Acquiring Corporation Common Stock, in each case on and after the
Effective Time pursuant thereto.
ARTICLE IV
A. The filing of the Certificate with the Department of State and the
consummation of the Exchange shall be subject to satisfaction of the following
conditions at or prior to the Effective Time:
(1) the affirmative vote of the holders of Subject Corporation Common
Stock provided for in Article I of this Agreement shall have been received;
(2) such orders, authorizations, approvals or waivers from the New York
Public Service Commission and all other jurisdictive regulatory bodies,
boards or agencies required to consummate the Exchange and related
transactions shall have been received, shall remain in full force and
effect, and shall not include, in the sole judgment of the Board of
Directors of the Subject Corporation, unacceptable conditions; and
(3) the Acquiring Corporation Common Stock to be issued in connection
with the Exchange shall have been listed, subject to official notice of
issuance, by the New York Stock Exchange.
ARTICLE V
Following the Effective Time, each holder of an outstanding certificate or
certificates theretofore representing shares of Subject Corporation Common Stock
may, but shall not be required to, surrender the same to the Acquiring
Corporation's Transfer Agent for cancellation and reissuance of a new
certificate or certificates in such holder's name or for cancellation and
transfer, and each such holder or transferee shall be entitled to receive a
certificate or certificates representing the same number of shares of Acquiring
Corporation Common Stock as the shares of Subject Corporation Common Stock
previously represented by the certificate or certificates surrendered. Until so
surrendered or presented for exchange or transfer, each outstanding certificate
which, immediately prior to the Effective Time, represents Subject Corporation
Common Stock shall be deemed and shall be treated for all purposes to represent
the ownership of the same number of shares of Acquiring Corporation Common Stock
as though such surrender or exchange or transfer had taken place. The holders of
Subject Corporation Common Stock at the Effective Time shall have no right at
and after the Effective Time to have their shares of Subject Corporation Common
Stock transferred on the stock transfer books of the Subject Corporation (such
stock transfer books being deemed closed for this purpose at the Effective
Time), and at and after the Effective Time such stock transfer books may be
deemed to be the stock transfer books of the Acquiring Corporation.
ARTICLE VI
A. This Agreement may be amended, modified or supplemented, or compliance
with any provision hereof may be waived, at any time prior to the Effective Time
(including, without limitation, after receipt
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of the affirmative vote of holders of Subject Corporation Common Stock as
provided in Article IV(l) hereof), by the mutual consent of the Boards of
Directors of the Subject Corporation and the Acquiring Corporation at any time
prior to the Effective Time; provided, however, that no such amendment,
modification, supplement or waiver shall be made or effected if such amendment,
modification, supplement or waiver would, in the sole judgment of the Board of
Directors of the Subject Corporation, materially and adversely affect the
shareholders of the Subject Corporation.
B. This Agreement may be terminated and the Exchange and related
transactions abandoned, at any time prior to the Effective Time (including,
without limitation, after receipt of the affirmative vote of holders of Subject
Corporation Common Stock as provided in Article IV(l) hereof), if the Board of
Directors of the Subject Corporation determines, in its sole judgment, that
consummation of the Exchange would for any reason be inadvisable or not in the
best interests of the Subject Corporation or its shareholders.
IN WITNESS WHEREOF, each of the Corporations, pursuant to authorization and
approval given by its Board of Directors, has caused this Agreement to be
executed as of the date first above written.
Niagara Mohawk Power Corporation
By:_ William E. Davis_________________
William E. Davis
Chairman of the Board and Chief
Financial Officer
Niagara Mohawk Holdings, Inc.
By:_ William F. Edwards________________
William F. Edwards
Chief Financial Officer
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EXHIBIT B
CERTIFICATE OF INCORPORATION
OF
NIAGARA MOHAWK HOLDINGS, INC.
UNDER SECTION 402 OF THE BUSINESS CORPORATION LAW
FIRST. The name of the corporation is Niagara Mohawk Holdings, Inc. (the
"Corporation").
SECOND. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Business Corporation
Law of the State of New York, provided that any act or activity requiring the
consent or approval of any State official, department, board, agency or other
body shall not be engaged in without such consent or approval first being
obtained.
THIRD. The office of the Corporation within the State of New York is to be
located in the City of Syracuse, County of Onondaga.
FOURTH. The aggregate number of shares which the Corporation shall have
authority to issue is (a) three hundred million (300,000,000) shares of common
shares with a par value of $0.01 per share (the "Common Stock") and fifty
million (50,000,000) shares of Preferred Stock, with a par value of $0.01 per
share (the "Preferred Stock").
The designations, relative rights, preferences and limitations of the shares
of such classes of stock are as follows:
A. The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series of Preferred Stock, and the Board
of Directors is expressly authorized, prior to issuance, in the resolution
or resolutions providing for the issue of shares of each particular series,
to establish and designate each particular series and to fix the rights,
preferences and limitations of each particular series, and the relative
rights, preferences and limitations between series, as follows:
(i) The distinctive serial designation of such series which shall
distinguish it from other series;
(ii) The number of shares included in such series, which number
(except where otherwise provided by the Board of Directors in creating
such series) may be increased (but not above the total number of
authorized shares of Preferred Stock) or decreased (but not below the
number of the outstanding shares of such series) from time to time by the
Board of Directors; provided that if the number of shares is decreased,
the shares constituting such decrease shall be restored to the status of
authorized but unissued shares of Preferred Stock;
(iii) The annual or other dividend rate or rates (or method of
determining such rate or rates) for shares of such series and the date or
dates upon which such dividends shall be payable;
(iv) Whether dividends on the shares of such series shall be
cumulative, and, in the case of shares of any series having cumulative
dividend rights, the date or dates (or method for determining such date
or dates) from which dividends on the shares of such series shall be
cumulative;
(v) The amount or amounts per share which shall be paid out of the
assets of the Corporation to the holders of the shares of such series
upon voluntary or involuntary liquidation, dissolution, or winding up of
the Corporation;
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(vi) The price or prices (cash or otherwise) at which, the period or
periods within which and the terms and conditions upon which, if any, the
shares of such series may be purchased, redeemed or acquired (by exchange
or otherwise), in whole or in part;
(vii) Provision or provisions, if any, for the Corporation to
purchase, redeem or acquire (by exchange or otherwise), in whole or in
part, shares of such series pursuant to a sinking or other similar fund,
and the price or prices (cash or otherwise) at which, the period or
periods within which and the terms and conditions upon which the shares
of such series shall be so purchased, redeemed or acquired, in whole or
in part, pursuant to such provision or provisions;
(viii) The period or periods within which and the terms and
conditions, including the price or prices or the rate or rates of
conversion or exchange and the terms and conditions of any adjustments
thereof, upon which, if any, the shares of such series shall be
convertible or exchangeable, in whole or in part, at the option of the
holder, the Corporation or another person into shares of any class of
stock or into shares of any series of any class or cash, other property,
indebtedness or other securities of the Corporation or another
corporation;
(ix) The voting rights, if any, of the shares of such series in
addition to those required by law, including the number of votes per
share (which may be fractional or more or less than one); and
(x) Any other relative rights, preferences or limitations of the
shares of such series not inconsistent with applicable law.
B. Except as may from time to time be required by law and except as
otherwise may be provided by the Board of Directors in accordance with
paragraph A of this Article 4 in respect of any particular series of
Preferred Stock, all voting rights of the Corporation shall be vested
exclusively in the holders of the Common Stock who shall be entitled to one
vote per share on all matters.
FIFTH. The Secretary of State of the State of New York is designated as
agent of the Corporation upon whom process in any action or proceeding against
it may be served. The address to which the Secretary of State shall mail a copy
of any process against the Corporation served upon him is 300 Erie Boulevard
West, Syracuse, New York 13202, Attn: Corporate Secretary.
SIXTH. Subject to the voting provisions of Article 10, By-laws of the
Corporation may be adopted, amended or repealed by the Board of Directors of the
Corporation by the vote of a majority of the directors present at a meeting of
the board at which a quorum is present.
SEVENTH. No holder of shares of the Corporation of any class, now or
hereafter authorized, shall have any preferential or preemptive right to
subscribe for, purchase or receive any shares of the corporation of any class,
now or hereafter authorized, or any options or warrants for such shares, or any
rights to subscribe for or purchase such shares, or any securities convertible
into or exchangeable for such shares, which may at any time be issued, sold or
offered for sale by the Corporation.
EIGHTH. Subject to the rights, if any, of holders of any class or series of
Preferred Stock, now or hereafter authorized, special meetings of shareholders
may be called only by the Chairman of the Board or by the Board of Directors
pursuant to resolution adopted by a majority of the total number of directors
which the Corporation would have if there were no vacancies.
NINTH. The following provisions shall relate to the Board of Directors of
the Corporation:
A. The size of the Board of Directors shall be fixed by or pursuant to
the By-Laws. The Board of Directors shall be divided into three classes
designated Class I, Class II and Class III. Such classes shall be as nearly
equal in number as the then total number of directors constituting the
entire Board permits. At the first annual meeting of shareholders, or any
special meeting in lieu thereof, Class I, Class II and Class III directors
shall be elected for terms expiring at the next succeeding annual meeting,
the second succeeding annual meeting and the third succeeding annual
meeting, respectively,
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and until their respective successors are elected and qualified. At each
annual meeting of shareholders after such first annual (or special) meeting
of shareholders, the directors chosen to succeed those in the class whose
terms then expire shall be elected by shareholders for terms expiring at the
third succeeding annual meeting after election, or for such lesser term for
which one or more may be nominated in a particular case in order to assure
that the number of directors in each class shall be appropriately
constituted and until their respective successors are elected and qualified.
Newly created directorships or any decrease in directorships resulting from
increases or decreases in the number of directors shall be so apportioned
among the classes of directors as to make all the classes as nearly equal in
number as possible. Vacancies on the Board of Directors at any time for any
reason except the removal of directors without cause may be filled by a
majority of the directors then in office, although less than a quorum. If
the number of directors is increased by the Board of Directors and any newly
created directorships are filled by the Board, there shall, to the extent
required by New York law, be no classification of the additional directors
until the next annual meeting of shareholders.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock, now or hereafter authorized, shall have
the right, voting separately or by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of office, filling
of vacancies and other features of such directorships shall be governed by any
provisions of the Certificate of Incorporation applicable thereto, and such
directors so elected shall not be divided into one or more classes pursuant to
this Article 9A unless expressly provided by such provisions.
B. Directors may be removed for cause by a vote of shareholders entitled
to vote thereon. Directors shall not be removed without cause by
shareholders, except in the case of a director elected by the holders of any
class or series of Preferred Stock, now or hereafter authorized, voting as a
class or series, when so entitled by the provisions of the Certificate of
Incorporation applicable thereto.
TENTH. In addition to any vote that may be required by law or in the
Certificate of Incorporation in respect of any class or series of Preferred
Stock, now or hereafter authorized, the provisions of Articles 6, 7, 8, 9, 10,
11 and 12 of the Certificate of Incorporation shall not be amended or repealed,
or a new provision adopted inconsistent therewith, without the affirmative vote
of not less than two-thirds of the shares entitled to vote thereon at such
annual or special meeting of shareholders at which any such action is proposed.
ELEVENTH. Except as otherwise provided in the Certificate of Incorporation
in respect of any class or series of Preferred Stock, now or hereafter
authorized, the By-Laws of the corporation may be amended or repealed, or new
By-Laws may be adopted, either (a) by a vote of shareholders entitled to vote at
any annual or special meeting of shareholders, or (b) by a vote of the majority
of the entire Board of Directors at any regular or special meeting of directors;
provided, however, that any amendment or repeal of, or the adoption of any new
By-Law or provision inconsistent with, Article I (Sections 1.2, 1.13 or 1.14),
Article II (Sections 2.2, 2.3, or 2.7) or Article VI (Sections 6.6 or 6.7) of
the By-Laws, if by action of such shareholders, shall be only upon the
affirmative vote of not less than two-thirds of the shares entitled to vote
thereon at such annual or special meeting of shareholders at which any such
action is proposed and, if by action of the Board of Directors, shall be only
upon the approval of not less than two-thirds of the entire Board of Directors
at any regular or special meeting of directors.
TWELFTH. Except as may be provided by the Board of Directors in accordance
with paragraph A of Article 4 in respect of any particular series of Preferred
Stock, any action required or permitted to be taken by the shareholders of the
corporation must be taken at a duly called annual or special meeting of such
holders and may not be taken by any consent in writing by such holders. Except
as otherwise provided for herein or required by law, special meetings of
shareholders of the corporation for any purpose or purposes may be called only
by the Chairman of the Board, the President or the Board of Directors pursuant
to a resolution stating the purpose or purposes thereof, and any power of
shareholders to call a special meeting is specifically denied.
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THIRTEENTH. A director of the Corporation shall not be personally liable to
the Corporation or its shareholders for damages for any breach of duty as a
director, except to the extent that such exemption from liability or limitation
thereof is not permitted under the Business Corporation Law as currently in
effect or as it may hereafter be amended. No amendment, modification or repeal
of this Article THIRTEENTH shall adversely affect any right or protection of a
director that exists at the time of such amendment, modification or repeal.
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EXHIBIT C
BY-LAWS
OF
NIAGARA MOHAWK HOLDINGS, INC.
ARTICLE 1
SHAREHOLDERS
Section 1.1. ANNUAL MEETING. A meeting of shareholders shall be held
annually for the election of directors at such date and time as may be
designated by the Board of Directors from time to time. Any other proper
business may be transacted at the annual meeting.
Section 1.2. SPECIAL MEETINGS. Special meetings of the shareholders may be
called by the Board of Directors, the Chairman of the Board or the President, to
be held at such date and time as may be stated in the notice of the meeting. At
any special meeting only such business may be transacted which is related to the
purpose or purposes set forth in the notice of such special meeting given
pursuant to Section 1.4 of these By-laws.
Section 1.3. PLACE OF MEETINGS. Meetings of shareholders shall be held at
such place, within or without the State of New York, as may be fixed by the
Board of Directors. If no place is so fixed, such meetings shall be held at the
principal office of the Corporation in the State of New York.
Section 1.4. NOTICE OF MEETINGS. Written notice of each meeting of
shareholders shall be given stating the place, date and hour of the meeting.
Notice of a special meeting of shareholders shall indicate that it is being
issued by or at the direction of the person or persons calling the meeting and
shall state the purpose or purposes for which the meeting is called. If, at any
meeting of shareholders, action is proposed to be taken which would, if taken,
entitle objecting shareholders to receive payment for their shares, the notice
of such meeting shall include a statement of that purpose and to that effect and
shall be accompanied by a copy of Section 623 of the New York Business
Corporation Law as then in effect or an outline of its material terms. A copy of
the notice of each meeting of shareholders shall be given, personally or by
first class mail, not fewer than ten nor more than sixty days before the date of
the meeting, or shall be given by third class mail not less than twenty-four nor
more than sixty days before the date of the meeting, to each shareholder
entitled to vote at such meeting. If mailed, such notice shall be deemed given
when deposited in the United States mail, with postage thereon prepaid, directed
to the shareholder at his or her address as it appears on the record of
shareholders, or, if he or she shall have filed with the Secretary of the
Corporation a written request that notices to him or her be mailed to some other
address, then directed to him or her at such other address. When a meeting of
shareholders is adjourned to another time or place, it shall not be necessary to
give any notice of the adjourned meeting if the time and place to which the
meeting is adjourned are announced at the meeting at which the adjournment is
taken, and at the adjourned meeting any business may be transacted that might
have been transacted on the original date of the meeting. However, if after the
adjournment the Board of Directors fixes a new record date for the adjourned
meeting, a notice of the adjourned meeting shall be given to each shareholder of
record on the new record date entitled to notice under this Section 1.4.
Section 1.5. WAIVER OF NOTICE. Notice of meeting need not be given to any
shareholder who submits a signed waiver of notice, in person or by proxy,
whether before or after the meeting. The attendance of any shareholder at a
meeting, in person or by proxy, without protesting prior to the conclusion of
the meeting the lack of notice of such meeting, shall constitute a waiver of
notice by him or her.
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Section 1.6. INSPECTORS. Voting at meetings of shareholders shall be
conducted by inspectors. The Board of Directors, in advance of any shareholders'
meeting, shall appoint one or more inspectors to act at the meeting or any
adjournment thereof. In case any person appointed fails to appear or act, the
vacancy may be filled by appointment made by the Board in advance of the meeting
or at the meeting by the person presiding thereat. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his or her ability. The inspectors
shall determine the number of shares outstanding and the voting power of each,
the shares represented at the meeting, the existence of a quorum and the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents, determine the
result, and do such acts as are proper to conduct the election or vote with
fairness to all shareholders. On request of the person presiding at the meeting
or any shareholder entitled to vote thereat, the inspectors shall make a report
in writing of any challenge, question or matter determined by them and execute a
certificate of any fact found by them.
Section 1.7. LIST OF SHAREHOLDERS AT MEETINGS. A list of shareholders as of
the record date, certified by the Secretary or any Assistant Secretary or by a
transfer agent, shall be produced at any meeting of shareholders upon the
request thereat or prior thereto of any shareholder. If the right to vote at any
meeting is challenged, the inspectors, or person presiding thereat, shall
require such list of shareholders to be produced as evidence of the right of the
persons challenged to vote at such meeting, and all persons who appear from such
list to be shareholders entitled to vote thereat may vote at such meeting.
Section 1.8. QUALIFICATION OF VOTERS. Every shareholder of record shall be
entitled at every meeting of shareholders to one vote for every share standing
in his or her name on the record of shareholders, unless otherwise provided in
the certificate of incorporation. If the certificate of incorporation provides
for more or less than one vote for any share on any matter, every reference in
these by-laws to a majority or other proportion of shares shall be construed to
refer to such majority or other proportion of the votes of such shares. Treasury
shares as of the record date and shares held as of the record date by another
domestic or foreign corporation of any type or kind, if a majority of the shares
entitled to vote in the election of directors of such other corporation is held
as of the record date by the Corporation, shall not be shares entitled to vote
or to be counted in determining the total number of outstanding shares. Shares
held by an administrator, executor, guardian, conservator, committee or other
fiduciary, except a trustee, may be voted by him or her or it, either in person
or by proxy, without transfer of such shares into his or her or its name. Shares
held by a trustee may be voted by him or her or it, either in person or by
proxy, only after the shares have been transferred into his or her or its name
as trustee or into the name of his or her or its nominee. Shares standing in the
name of another domestic or foreign corporation of any type or kind may be voted
by such officer, agent or proxy as the by-laws of such corporation may provide,
or, in the absence of such provision, as the board of directors of such
corporation may determine. A shareholder shall not sell his or her vote or issue
a proxy to vote to any person for any sum of money or anything of value except
as permitted by law.
Section 1.9. QUORUM OF SHAREHOLDERS. The holders of a majority of the votes
of shares entitled to vote thereat shall constitute a quorum at a meeting of
shareholders for the transaction of any business, provided that when a specified
item of business is required to be voted on by a class or series, voting as a
class, the holders of a majority of the votes of shares of such class or series
shall constitute a quorum for the transaction of such specified item of
business. When a quorum is once present to organize a meeting, it is not broken
by the subsequent withdrawal of any shareholders. The shareholders present in
person or by proxy and entitled to vote may, by a majority of the votes cast,
adjourn the meeting despite the absence of a quorum.
Section 1.10. PROXIES. Every shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent without a meeting may authorize
another person or persons to act for him or her by proxy. No proxy shall be
valid after the expiration of eleven months from the date thereof unless
otherwise
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provided in the proxy. Every proxy shall be revocable at the pleasure of the
shareholder executing it, except as otherwise provided by law. The authority of
the holder of a proxy to act shall not be revoked by the incompetence or death
of the shareholder who executed the proxy unless, before the authority is
exercised, written notice of an adjudication of such incompetence or of such
death is received by the Secretary or any Assistant Secretary.
Section 1.11. VOTE OR CONSENT OF SHAREHOLDERS. Directors shall, except as
otherwise required by law or by the certificate of incorporation, be elected by
a plurality of the votes cast at a meeting of shareholders by the holders of
shares entitled to vote in the election. Whenever any corporate action, other
than the election of directors, is to be taken by vote of the shareholders, it
shall, except as otherwise required by law or by the certificate of
incorporation, be authorized by a majority of the votes cast at a meeting of
shareholders by the holders of shares entitled to vote thereon. Whenever
shareholders are required or permitted to take any action by vote, such action
may be taken without a meeting on written consent, setting forth the action so
taken, signed by the holders of all outstanding shares entitled to vote thereon.
Written consent thus given by the holders of all outstanding shares entitled to
vote shall have the same effect as a unanimous vote of shareholders.
Section 1.12. FIXING RECORD DATE. For the purpose of determining the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividend or the allotment of any rights, or for the
purpose of any other action, the Board of Directors may fix, in advance, a date
as the record date for any such determination of shareholders. Such date shall
not be more than fifty nor less than ten days before the date of such meeting,
nor more than fifty days prior to any other action. If no record date is fixed:
(1) the record date for the determination of shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if no notice is given,
the day on which the meeting is held; and (2) the record date for determining
shareholders for any other purpose shall be at the close of business on the day
on which the resolution of the Board of Directors relating thereto is adopted.
When a determination of shareholders of record entitled to notice of or to vote
at any meeting of shareholders has been made as provided in this Section, such
determination shall apply to any adjournment thereof, unless the Board of
Directors fixes a new record date for the adjourned meeting.
Section 1.13. ADVANCE NOTICE OF SHAREHOLDER PROPOSALS. At any annual or
special meeting of shareholders, proposals by shareholders and persons nominated
for election as directors by shareholders shall be considered only if advance
notice thereof has been timely given as provided herein and such proposals or
nominations are otherwise proper for consideration under applicable law and the
certificate of incorporation and by-laws of the Corporation. Notice of any
proposal to be presented by any shareholder or of the name of any person to be
nominated by any shareholder for election as a director of the Corporation at
any meeting of shareholders shall be delivered to the Secretary of the
Corporation at its principal executive office not less than 60 nor more than 90
days prior to the date of the meeting; provided, however, that if the date of
the meeting is first publicly announced or disclosed (in a public filing or
otherwise) less than 70 days prior to the date of the meeting, such advance
notice shall be given not more than ten days after such date is first so
announced or disclosed. Public notice shall be deemed to have been given more
than 70 days in advance of the annual meeting if the Corporation shall have
previously disclosed, in these by-laws or otherwise, that the annual meeting in
each year is to be held on a determinable date, unless and until the Board
determines to hold the meeting on a different date. Any shareholder who gives
notice of any such proposal shall deliver therewith the text of the proposal to
be presented and a brief written statement of the reasons why such shareholder
favors the proposal and setting forth such shareholder's name and address, the
number and class of all shares of each class of stock of the Corporation
beneficially owned by such shareholder and any material interest of such
shareholder in the proposal (other than as a shareholder). Any shareholder
desiring to nominate any person for election as a director of the Corporation
shall deliver with such notice a statement in writing setting forth the name of
the person to be
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nominated, the number and class of all shares of each class of stock of the
Corporation beneficially owned by such person, the information regarding such
person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K
adopted by the Securities and Exchange Commission (or the corresponding
provisions of any regulation subsequently adopted by the Securities and Exchange
Commission applicable to the Corporation), such person's signed consent to serve
as a director of the Corporation if elected, such shareholder's name and address
and the number and class of all shares of each class of stock of the Corporation
beneficially owned by such shareholder. As used herein, shares "beneficially
owned" shall mean all shares as to which such person, together with such
person's affiliates and associates (as defined in Rule 12b-2 under the
Securities Exchange Act of 1934), may be deemed to beneficially own pursuant to
Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as well as all
shares as to which such person, together with such person's affiliates and
associates, has the right to become the beneficial owner pursuant to any
agreement or understanding, or upon the exercise of warrants, options or rights
to convert or exchange (whether such rights are exercisable immediately or only
after the passage of time or the occurrence of conditions). The person presiding
at the meeting, in addition to making any other determinations that may be
appropriate to the conduct of the meeting, shall determine whether such notice
has been duly given and shall direct that proposals and nominees not be
considered if such notice has not been given.
Section 1.14. ORGANIZATION. Meetings of shareholders shall be presided over
by the Chairman of the Board, if any, or in the absence of the Chairman of the
Board by the President, or in the absence of the President by a Vice President,
or in the absence of the foregoing persons by a chairman designated by the Board
of Directors, or in the absence of such designation by a chairman chosen at the
meeting. The Secretary, or in the absence of the Secretary an Assistant
Secretary, shall act as secretary of the meeting, but in the absence of the
Secretary and any Assistant Secretary the chairman of the meeting may appoint
any person to act as secretary of the meeting. The order of business at each
such meeting shall be as determined by the chairman of the meeting. The chairman
of the meeting shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things as are necessary
or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the maintenance of order and
safety, limitations on the time allotted to questions or comments on the affairs
of the Corporation, restrictions on entry to such meeting after the time
prescribed for the commencement thereof and the opening and closing of the
voting polls.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1. POWER OF BOARD AND QUALIFICATION OF DIRECTORS. The business of
the Corporation shall be managed under the direction of the Board of Directors.
Each director shall be at least eighteen years of age. No person who has reached
age 70 by January 1 in the year such director would otherwise stand for election
shall, following their initial election, stand for reelection as a director.
Section 2.2. NUMBER OF DIRECTORS. The number of directors constituting the
entire Board of Directors shall be the number, not less than three, fixed from
time to time by a majority of the total number of directors which the
Corporation would have, prior to any increase or decrease, if there were no
vacancies, provided that no decrease shall shorten the term of any incumbent
director.
Section 2.3. ELECTION, TERMS AND VACANCIES. The Board of Directors shall be
divided into three classes designated Class I, Class II and Class III. Such
classes shall be as nearly equal in number as the then total number of directors
constituting the entire Board permits. At the first annual meeting of
shareholders, or any special meeting in lieu thereof, Class I, Class II and
Class III directors shall be elected for terms expiring at the next succeeding
annual meeting, the second succeeding annual meeting and the third succeeding
annual meeting, respectively, and until their respective successors are elected
and qualified. At each annual meeting of shareholders after such first annual
(or special) meeting shareholders, the directors chosen to succeed those in the
class whose terms then expire shall be elected by shareholders for
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terms expiring at the third succeeding annual meeting after election, or for
such lesser term for which one or more may be nominated in a particular case in
order to assure that the number of directors in each class shall be
appropriately constituted and until their respective successors are elected and
qualified. Newly created directorships or any decrease in directorships
resulting from increases or decreases in the number of directors shall be so
apportioned among the classes of directors as to make all the classes as nearly
equal in number as possible. Vacancies on the Board of Directors at any time for
any reason except the removal of directors without cause may be filled by a
majority of the directors then in office, although less than a quorum. If the
number of directors is increased by the Board of Directors and any newly created
directorships are filled by the Board, there shall, to the extent required by
New York law, be no classification of the additional directors until the next
annual meeting of shareholders.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock, now or hereafter authorized, shall have
the right, voting separately or by class or series, to elect directors at an
annual or special meeting of shareholders, the election, term of office, filling
of vacancies and other features of such directorships shall be governed by any
provisions of the Certificate of Incorporation applicable thereto, and such
directors so elected shall not be divided into one or more classes pursuant to
this Section 2.3 unless expressly provided by such provisions.
Section 2.4. QUORUM OF DIRECTORS AND ACTION BY THE BOARD. Unless a greater
proportion is required by law or by the certificate of incorporation, one third
of the entire Board of Directors shall constitute a majority for the transaction
of business or of any specified item of business. Except where otherwise
provided by law or in the certificate of incorporation or these by-laws, the
vote of a majority of the directors present at a meeting at the time of such
vote, if a quorum is then present, shall be the act of the Board. Any action
required or permitted to be taken by the Board of Directors may be taken without
a meeting if all members of the Board consent in writing to the adoption of a
resolution authorizing the action. The resolution and the written consents by
the members of the Board shall be filed with the minutes of the proceedings of
the Board. Except as otherwise provided by law, all corporate action to be taken
by the Board of Directors shall be taken at a meeting of the Board or by
unanimous written consent. Any one or more members of the Board of Directors may
participate in a meeting of the Board by means of a conference telephone or
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time, and participation by such means
shall constitute presence in person at such meeting.
Section 2.5. MEETINGS OF THE BOARD. An annual meeting of the Board of
Directors shall be held in each year as soon as practicable after the annual
meeting of shareholders. Regular meetings of the Board shall be held at such
times as may be fixed by the Board. Special meetings of the Board may be held at
any time whenever called by the Chairman of the Board, if any, the President or
any two directors. Meetings of the Board of Directors shall be held at such
places within or without the State of New York as may be fixed by the Board for
annual and regular meetings and in the notice of meeting for special meetings.
If no place is so fixed, meetings of the Board shall be held at the principal
office of the Corporation. No notice need be given of annual or regular meetings
of the Board of Directors. Notice of each special meeting of the Board shall be
given to each director either by mail not later than the third business day
prior to the meeting or by telegram, by facsimile transmission, by written
message or orally to the director not later than noon, New York time, on the day
prior to the meeting. Notices shall be deemed to have been given by mail when
deposited in the United States mail, by telegram at the time of filing, by
facsimile transmission upon confirmation of receipt, and by messenger at the
time of delivery by the messenger. Notices by mail, telegram, facsimile
transmission or messenger shall be sent to each director at the address or
facsimile number designated by him or her for that purpose, or, if none has been
so designated, at his or her last known residence or business address. Notice of
a meeting of the Board of Directors need not be given to any director who
submits a signed waiver of notice whether before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to him or her. A notice or waiver of notice need not specify
the purpose of any meeting of the Board of Directors. A
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majority of the directors present, whether or not a quorum is present, may
adjourn any meeting to another time and place. Notice of any adjournment of a
meeting to another time or place shall be given in the manner described above to
the directors who were not present at the time of the adjournment and, unless
such time and place are announced at the meeting, to the other directors.
Section 2.6. RESIGNATION. Any director of the Corporation may resign at any
time by giving written notice to the Board of Directors or to the Chairman of
the Board, if any, or the President or the Secretary of the Corporation. Such
resignation shall take effect at the time specified therein, and unless
otherwise specified therein no acceptance of such resignation shall be necessary
to make it effective.
Section 2.7. REMOVAL OF DIRECTORS. Directors may be removed for cause by a
vote of shareholders entitled to vote thereon. Directors shall not be removed
without cause by shareholders, except in the case of a director elected by the
holders of any class or series of Preferred Stock, now or hereafter authorized,
voting as a class or series, when so entitled by the provisions of the
Certificate of Incorporation applicable thereto.
Section 2.8. COMPENSATION OF DIRECTORS. The Board of Directors shall have
authority to fix the compensation of directors for services in any capacity,
which shall be a charge to be paid by the Corporation. The Board of Directors
may elect or appoint members of the Board as officers, members of committees, or
agents of the Corporation, may assign duties to be performed and may fix the
amount of the respective salaries, fees or other compensation therefor, and the
amount so fixed shall be a charge to be paid by the Corporation. In addition to
any other compensation provided pursuant to these by-laws, each director shall
be entitled to receive a fee, in amount as fixed from time to time by resolution
of the Board of Directors, for attendance at any meeting of the Board, or of any
committee of the Board, together with his expenses of attendance, if any.
ARTICLE III
EXECUTIVE AND OTHER COMMITTEES
Section 3.1. EXECUTIVE AND OTHER COMMITTEES OF DIRECTORS. The Board of
Directors, by resolution adopted by a majority of the entire Board, shall
designate from among its members an Executive Committee, an Audit Committee and
a Finance Committee and may designate such other committees, each consisting of
one or more directors, and each of which, to the extent provided in the
resolution, shall have all the authority of the Board, except that no such
committee shall have authority as to (1) the submission to shareholders of any
action that needs shareholders' approval; (2) the filling of vacancies in the
Board or in any committee thereof; (3) the fixing of compensation of the
directors for serving on the Board or on any committee thereof; (4) the
amendment or repeal of the by-laws, or the adoption of new by-laws; or (5) the
amendment or repeal of any resolution of the Board which, by its terms, shall
not be so amendable or repealable. The Board of Directors may designate one or
more directors as alternate members of any such committee, who may replace any
absent member or members at any meeting of such committee. Unless the Board of
Directors otherwise provides, each committee designated by the Board may adopt,
amend and repeal rules for the conduct of its business. In the absence of a
provision by the Board or a provision in the rules of such committee to the
contrary, a majority of the entire authorized number of members of such
committee shall constitute a quorum for the transaction of business, the vote of
a majority of the members present at a meeting at the time of such vote if a
quorum is then present or the unanimous written consent of all members thereof
shall be the act of such committee, any one or more members of such committee
may participate in a meeting of such committee by means of a conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other at the same time and participation by such
means shall constitute presence in person at such meeting, and in other respects
each committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these by-laws. Each
such committee shall serve at the pleasure of the Board of Directors.
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Section 3.2. EXECUTIVE COMMITTEE. When the Board of Directors is not in
session, the Executive Committee shall have all of the authority of the Board of
Directors, except it shall have no authority as to the matters specified in
Section 3.1. The Chairman of the Board shall be Chairman of the Executive
Committee. The members of the Executive Committee shall serve at the pleasure of
the Board of Directors.
Section 3.3. AUDIT COMMITTEE. The Audit Committee shall recommend to the
Board of Directors the accounting firm to be selected by the Board or to be
recommended by it for shareholder approval, as independent auditor of the
Corporation and its subsidiaries; act on behalf of the Board in meeting and
reviewing with the independent auditors, the chief internal auditor and the
appropriate corporate officers matters relating to corporate financial reporting
and accounting procedures and policies, adequacy of internal controls and the
scope of the respective audits of the independent auditors and the internal
auditor; review the results of such audits with the respective auditing agency
and reporting thereon to the Board; review and make recommendations to the Board
concerning the independent auditor's fees and services; review interim and
annual financial reports and disclosures and submit to the Board any
recommendations it may have from time to time with respect to financial
reporting and accounting practices and policies; be consulted, and its consent
obtained, prior to the selection or termination of the chief internal auditor;
oversee matters involving compliance with corporate business ethics policies
including the work of the Business Ethics Council; review management's
assessment of financial risks; authorize special investigations and studies, as
appropriate, in fulfillment of its function as specified herein or by resolution
of the Board of Directors; and perform any other duties or functions deemed
appropriate by the Board of Directors. The Committee will conduct a
self-assessment at least every three years of its performance in relation to its
powers and responsibilities. The membership of such committee shall consist only
of directors of the Corporation who are not, and have not been, officers of the
company.
Section 3.4. FINANCE COMMITTEE. The Finance Committee shall exercise such
powers of the Board of Directors as shall be provided in one or more resolutions
of the Board of Directors with respect to the issuance by the Corporation of
securities and evidences of indebtedness and the participation by the
Corporation in other financing transactions and with respect to the
authorization of the making, modification, alteration, termination or abrogation
of notes, bills, mortgages, sales, deeds, financing leases, liens and contracts
of the Corporation and shall further be empowered to take any action in
connection with the determination of the terms of any securities, evidences of
indebtedness or other financing transactions of the Corporation the issuance of
which by the Corporation or the participation in which by the Corporation shall
have theretofore been approved by the Board of Directors, and shall further
perform any other duties or functions deemed appropriate by the Board of
Directors.
ARTICLE IV
OFFICERS
Section 4.1. OFFICERS. The officers of the Corporation shall consist of a
Chairman of the Board, a President, one or more Vice-Presidents, a Secretary, a
Controller, a Treasurer, and such Assistant Secretaries, Assistant Controllers
and Assistant Treasurers and other officers as shall be elected or appointed by
the Board of Directors. The Board of Directors may elect or appoint a General
Counsel upon such terms and with such powers and duties as it may prescribe and
may also designate the General Counsel an officer of the Corporation.
Section 4.2. ELECTION. The officers of the Corporation shall be elected or
appointed by the Board of Directors at the meeting of the Board held after each
annual meeting of the stockholders. The Chairman of the Board and the President
shall be elected or appointed by the Board of Directors from among their number.
Any number of Vice-Presidents, the Secretary, the Controller, the Treasurer and
other officers established pursuant to resolution of the Board of Directors
shall also be elected or appointed by the Board of Directors.
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Section 4.3. TERM OF OFFICE. The officers of the Corporation shall hold
office until the meeting of the Board of Directors held after the next annual
meeting of the stockholders and until their successors are elected and have
qualified, unless a shorter term is fixed or unless removed, subject to the
provisions of law, by the Board of Directors. The Chairman of the Board, the
President, any Vice- President, the Secretary, the Controller or the Treasurer
may be removed at any time, with or without cause, by the Board of Directors
provided that notice of the meeting at which such action shall have been taken
shall set forth such action as one of the purposes of such meeting. Any other
officer of the Corporation may be removed at any time, with or without cause, by
the Board of Directors. If the office of any officer becomes vacant for any
reason, the vacancy may be filled by the Board of Directors at any time to serve
the remaining current term of that office.
Section 4.4. CHAIRMAN OF THE BOARD. There shall be a chairman of the Board
of Directors, with the official title "Chairman of the Board", who shall be the
chief executive officer of the Corporation. The Chairman of the Board shall
preside at meetings of the stockholders, the Board of Directors and the
Executive Committee. He shall recommend to the Board policies to be followed by
the Corporation, and, subject to the Board, shall have general charge of the
policies and business of the Corporation and general supervision of the details
thereof, and shall supervise the operation, maintenance and preservation of the
properties of the Corporation. He shall keep the Board of Directors informed
respecting the business of the Corporation. He shall have authority to sign on
behalf of the Corporation all contracts and other documents or instruments to be
signed or executed by the Corporation, and, in all cases where the duties and
powers of subordinate officers and agents of the Corporation are not
specifically prescribed by the by-laws or by resolutions of the Board of
Directors, the Chairman of the Board may prescribe such duties and powers. He
shall perform such other duties as may from time to time be assigned to him by
the Board of Directors.
Section 4.5. PRESIDENT. The President shall have the direction of and
responsibility for the operations of the Corporation and such other powers and
duties as the Board of Directors or the Chairman of the Board shall designate
from time to time and, in the absence or inability to act of the Chairman of the
Board, shall have the powers and duties of the Chairman of the Board. The
President, unless some other person is thereunto specifically authorized by vote
of the Board of Directors, shall have authority to sign all contracts and other
documents and instruments of the Corporation.
Section 4.6. THE VICE-PRESIDENTS. The Vice-Presidents may be designated by
such title or titles and in such order of seniority as the Board of Directors
may determine. The Vice-Presidents shall perform such of the duties and exercise
such of the powers of the President on behalf of the Corporation as may be
assigned to them respectively from time to time by the Board of Directors or by
the Chairman of the Board or the President, and, subject to the control of the
Board, shall have authority to sign on behalf of the Corporation all contracts
and other documents or instruments necessary for the conduct of the business of
the Corporation. The Vice-Presidents shall perform such other duties as may from
time to time be assigned to them respectively by the Board of Directors or the
Chairman of the Board or the President.
Section 4.7. THE SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall
cause notices of all meetings of stockholders and directors to be given as
required by law, the corporate charter, and these by-laws. He shall attend all
meetings of stockholders and of the Board of Directors and keep the minutes
thereof. He shall affix the corporate seal to and sign such instruments as
require the seal and his signature and shall perform such other duties as
usually pertain to his office or as are required of him by the Board of
Directors or the Chairman of the Board or the President.
Any Assistant Secretary may, in the absence or disability of the Secretary,
or at his request, perform the duties and exercise the powers of the Secretary,
and shall perform such other duties as the Board of Directors, the Chairman of
the Board, the President or the Secretary shall prescribe.
The Secretary or any Assistant Secretary may certify under the corporate
seal as to the corporate charter or these by-laws or any provision thereof, the
acts of the Board of Directors or any committee
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thereof, the tenure, signatures, identity and acts of officers of the
Corporation or other corporate facts, and any such certificate may be relied
upon by any person or Corporation to whom the same shall be given until receipt
of written notice to the contrary.
In the absence of the Secretary and of an Assistant Secretary, the
stockholders or the Board of Directors may appoint a secretary pro tem to record
the proceedings of their respective meetings and to perform such other acts
pertaining to said office as they may direct.
Section 4.8. THE CONTROLLER AND ASSISTANT CONTROLLERS. The Controller shall
be the chief accounting officer of the Corporation. He shall have general
supervision of the accounting and financial reporting policies of the
Corporation, and shall recommend policies and procedures and shall render
current and periodic reports of financial status to the Chairman of the Board,
the President and the Board of Directors. He shall perform such other duties as
usually pertain to his office or as are required of him by the Board of
Directors or the Chairman of the Board or the President.
Any Assistant Controller may, in the absence or disability of the
Controller, or at his request, perform the duties and exercise the powers of the
Controller and shall perform such other duties as the Board of Directors, the
Chairman of the Board, the President or the Controller shall prescribe.
Section 4.9. THE TREASURER AND ASSISTANT TREASURERS. The Treasurer is
authorized and empowered to receive and collect all moneys due the Corporation
and to receipt for the same. He shall be empowered to execute on behalf of the
Corporation all instruments, agreements and certificates necessary or
appropriate to effect the issuance by the Corporation of securities or evidences
of indebtedness or to permit the Corporation to enter into and perform any other
financing transactions to the extent the foregoing are within the ordinary
course of business of the Corporation or have been authorized by the Board of
Directors or a committee thereof. He shall cause to be entered in books of the
Corporation to be kept for that purpose full and accurate accounts of all moneys
received by and paid on account of the Corporation. He shall make and sign such
reports, statements, and instruments as may be required of him by the Board of
Directors or by laws of the United States or the State of New York, or by
commission, bureau, department or agency created under any such laws, and shall
perform such other duties as usually pertain to his office or as are required of
him by the Board of Directors or the Chairman of the Board or the President.
Any Assistant Treasurer may, in the absence or disability of the Treasurer,
or at his request, perform the duties and exercise the powers of the Treasurer
and shall perform such other duties as the Board of Directors, the Chairman of
the Board, or the President, or the Treasurer shall prescribe.
Section 4.10. ADDITIONAL OFFICERS. In addition to the officers provided for
by these by-laws, the Board of Directors may, from time to time, designate and
appoint such other officers as may be necessary or convenient for the
transaction of the business and affairs of the Corporation. Such other officers
shall have such powers and duties as may be assigned to them by resolution of
the Board of Directors.
Section 4.11. OFFICERS HOLDING TWO OR MORE OFFICES. Any two or more of the
above-mentioned offices may be held by the same person, except that the
President shall not also be the Secretary, but no officer shall execute or
verify any instrument in more than one capacity if such instrument be required
by law or otherwise to be executed or verified by any two or more officers.
Section 4.12. DUTIES OF OFFICERS MAY BE DELEGATED. In case of the absence of
any officer of the Corporation, or for any other reason that the Board of
Directors may deem sufficient, the Board of Directors may delegate, for the time
and to the extent specified, the powers or duties of any officer to any other
officer, or to any director.
Section 4.13. COMPENSATION. The compensation of all officers with an
assigned salary level above the scale of Salary Grade N as prescribed in the
Salary Administration Program, as adopted by the Board of Directors, shall be
fixed by the Board of Directors. The compensation of all other officers and
employees
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shall be fixed by the Chairman of the Board or by the President in accordance
with the Salary Administration Program.
Section 4.14. BONDS. The Board of Directors may require any officer, agent
or employee of the Corporation to give a bond to the Corporation, conditional
upon the faithful performance of his duties, with one or more sureties and in
such amount as may be satisfactory to the Board of Directors. The premium
payable to any surety company for such bond shall be paid by the Corporation.
ARTICLE V
FORMS OF CERTIFICATES AND LOSS AND
TRANSFER OF SHARES
Section 5.1. FORMS OF SHARE CERTIFICATES. The shares of the Corporation
shall be represented by certificates, in such forms as the Board of Directors
may prescribe, signed by the Chairman of the Board or the President or a
Vice-President and the Secretary or an Assistant Secretary or the Treasurer or
an Assistant Treasurer, and may be sealed with the seal of the Corporation or a
facsimile thereof. The signatures of the officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or registered
by a registrar other than the Corporation itself or its employee or if the
shares are listed on a national securities exchange. In case any officer who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer before such certificate is issued, it may be
issued by the Corporation with the same effect as if he or she were such officer
at the date of issue. If the Corporation is authorized to issue shares of more
than one class, each certificate representing shares issued by the Corporation
shall set forth upon the face or back of the certificate, or shall state that
the Corporation will furnish to any shareholder upon request and without charge,
a full statement of the designation, relative rights, preferences and
limitations of the shares of each class authorized to be issued and the
designation, relative rights, preferences and limitations of each series of any
class of preferred shares authorized to be issued in series so far as the same
have been fixed and the authority of the Board of Directors to designate and fix
the relative rights, preferences and limitations of other series. Each
certificate representing shares shall state upon the face thereof (1) that the
Corporation is formed under the laws of the State of New York; (2) the name of
the person or persons to whom issued; and (3) the number and class of shares,
and the designation of the series, if any, which such certificate represents.
Section 5.2. TRANSFERS OF SHARES. Shares of the Corporation shall be
transferable on the record of shareholders upon presentation to the Corporation
or a transfer agent of a certificate or certificates representing the shares
requested to be transferred, with proper endorsement on the certificate or on a
separate accompanying document, together with such evidence of the payment of
transfer taxes and compliance with other provisions of law as the Corporation or
its transfer agent may require.
Section 5.3. LOST, STOLEN OR DESTROYED SHARE CERTIFICATES. The Corporation
may issue a new certificate for shares in place of any certificate theretofore
issued by it, alleged to have been lost or destroyed, and the Corporation may
require the owner of the lost or destroyed certificate, or such owner's legal
representative, to give the Corporation a bond sufficient to indemnify it
against any claim that may be made against it on account of the alleged loss or
destruction of any such certificate or the issuance of any such new certificate.
ARTICLE VI
OTHER MATTERS
Section 6.1. CORPORATE SEAL. The Board of Directors may adopt a corporate
seal, alter such seal at pleasure, and authorize it to be used by causing it or
a facsimile to be affixed or impressed or reproduced in any other manner.
Section 6.2. FISCAL YEAR. The fiscal year of the Corporation shall be fixed
by the Board of Directors.
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Section 6.3. WHEN NOTICE OR LAPSE OF TIME UNNECESSARY. Whenever for any
reason the Corporation or the Board of Directors or any committee thereof is
authorized to take any action after notice to any person or persons or after the
lapse of a prescribed period of time, such action may be taken without notice
and without the lapse of such period of time if at any time before or after such
action is completed the person or persons entitled to such notice or entitled to
participate in the action to be taken or, in the case of a shareholder, his or
her attorney-in-fact, submit a signed waiver of notice of such requirements.
Section 6.4. BOOKS TO BE KEPT. The Corporation shall keep (a) correct and
complete books and records of account, (b) minutes of the proceedings of the
shareholders, Board of Directors and each committee and (c) a current list of
the directors and officers and their residence addresses; and the Corporation
shall also keep at its office located in the county of Onondaga in the State of
New York or at the office of its transfer agent or registrar in the State of New
York, if any, a record containing the names and addresses of all shareholders,
the number and class of shares held by each and the dates when they respectively
became the owners of record thereof. Any of the foregoing books, minutes or
records may be in written form or in any other form capable of being converted
into written form within a reasonable time.
Section 6.5. INTEREST OF DIRECTORS AND OFFICERS IN TRANSACTIONS. In the
absence of fraud, no contract or other transaction between the Corporation and
one or more of its directors, or between the Corporation and any other
Corporation, firm, association or other entity in which one or more of its
directors are directors or officers, or have a substantial financial interest,
shall be either void or voidable, irrespective of whether such interested
director or directors are present at the meeting of the Board of Directors, or
of a committee thereof, which approves such contract or transaction and
irrespective of whether his, her or their votes are counted for such purpose:
(1) If the material facts as to such director's interest in such
contract or transaction and as to any such common directorship, officership
or financial interest are disclosed in good faith or known to the Board of
Directors, or a committee thereof, and the Board or committee approves such
contract or transaction by a vote sufficient for such purpose without
counting the vote of such interested director or, if the votes of the
disinterested directors are insufficient to constitute an act of the Board
under Section 2.4 of these by-laws, by unanimous vote of the disinterested
directors; or
(2) If the material facts as to such director's interest in such
contract or transaction and as to any such common directorship, officership
or financial interest are disclosed in good faith or known to the
shareholders entitled to vote thereon, and such contract or transaction is
approved by vote of such shareholders.
If a contract or other transaction between the Corporation and one or more
of its directors, or between the Corporation and any other Corporation, firm,
association or other entity in which one or more of its directors are directors
or officers or have a substantial financial interest, is not so approved, the
Corporation may avoid the contract or transaction unless the party or parties
thereto shall establish affirmatively that the contract or transaction was fair
and reasonable as to the Corporation at the time it was approved by the Board, a
committee or the shareholders. Notwithstanding the foregoing, no loan, except
advances in connection with indemnification, shall be made by the Corporation to
any director unless it is authorized by vote of the shareholders. For this
purpose, shares of the director who would be the borrower shall not be shares
entitled to vote.
Section 6.6. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. The
Corporation shall indemnify to the full extent permitted by law any person made
or threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that
such person or such person's testator or intestate is or was a director, officer
or employee of the Corporation or serves or served at the request of the
Corporation any other enterprise as a director, officer or employee. Expenses
incurred by any such person in defending any such action, suit or proceeding
shall be paid or reimbursed by the Corporation promptly upon receipt by it of an
undertaking of such person to repay such expenses if it shall ultimately be
determined that such person is not entitled to be indemnified by the
Corporation. The
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rights provided to any person by this by-law shall be enforceable against the
Corporation by such person who shall be presumed to have relied upon it in
serving or continuing to serve as a director, officer or employee as provided
above. No amendment of this by-law shall impair the rights of any person arising
at any time with respect to events occurring prior to such amendment. For
purposes of this by-law, the term "Corporation" shall include any predecessor of
the Corporation and any constituent Corporation (including any constituent of a
constituent) absorbed by the Corporation in a consolidation or merger; the term
"other enterprise" shall include any Corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise; service "at the request of the
Corporation" shall include service as a director, officer or employee of the
Corporation which imposes duties on, or involves services by, such director,
officer or employee with respect to an employee benefit plan, its participants
or beneficiaries; any excise taxes assessed on a person with respect to an
employee benefit plan shall be deemed to be indemnifiable expenses; and action
taken or omitted by a person with respect to an employee benefit plan which such
person reasonably believes to be in the interest of the participants and
beneficiaries of such plan shall be deemed to be action not opposed to the best
interests of the Corporation.
Section 6.7. AMENDMENTS. Except as otherwise provided in the Certificate of
Incorporation in respect of any class or series of Preferred Stock, now or
hereafter authorized, the By-Laws of the Corporation may be amended or repealed,
or new By-Laws may be adopted, either (a) by a vote of shareholders entitled to
vote at any annual or special meeting of shareholders, or (b) by a vote of the
majority of the entire Board of Directors at any regular or special meeting of
directors; PROVIDED, HOWEVER, that any amendment or repeal of, or the adoption
of any new By-Law or provision inconsistent with, Article I (Sections 1.2, 1.13
or 1.14), Article II (Sections 2.2, 2.3, or 2.7) or Article VI (Sections 6.6 or
6.7) of these By-Laws, if by action of such shareholders, shall be only upon the
affirmative vote of not less than two-thirds of the shares entitled to vote
thereon at such annual or special meeting of shareholders at which any such
action is proposed and, if by action of the Board of Directors, shall be only
upon the approval of not less than two-thirds of the entire Board of Directors
at any regular or special meeting of directors.
C-12
<PAGE>
[DLJ Letterhead]
May 14, 1998
Board of Directors
Niagara Mohawk Power Corporation
300 Erie Boulevard West
Syracuse, NY 13202
Ladies and Gentlemen:
We understand that Niagara Mohawk Power Corporation (the "Company") has
entered into a Master Restructuring Agreement dated as of July 9, 1997 (as
amended, the "MRA"). Pursuant to the MRA, the Company and 14 independent power
producers party thereto (the "IPPs") have agreed to terminate, restate or amend
27 power purchase agreements (the "PPAs") between the Company and such IPPs in
exchange for cash and shares of the Company's common stock, par value $1.00 per
share (the "Common Shares"). The cash payments to be made by the Company under
the MRA are proposed to be financed through a combination of cash on hand and
the issuance of debt securities in a public offering. The above transactions
(including the proposed debt financing) are referred herein as the "MRA
Transactions."
In addition, we understand that on March 20, 1998, the New York Public
Service Commission entered an order approving the Company's PowerChoice
Settlement Agreement (the "PowerChoice Agreement"). Under the PowerChoice
Agreement, the Company's rate and tariff structure (the "Rates") has been fixed
for five years, and the Company is required to divest certain of its fossil and
hydro generating assets (the "Genco Divestiture"). Management of the Company has
instructed us to assume for comparative purposes only, and we have assumed, that
the Company will be subject to the Rates provided in the PowerChoice Agreement
and to the requirement that the Company divest certain generating assets whether
or not it consummates the MRA Transactions (the "PowerChoice Assumption"). We
understand that if the MRA Transactions are in fact not consummated, the Company
would not necessarily be subject to these provisions of the PowerChoice
Agreement.
You have asked that we confirm in writing our opinion with respect to the
relative value from a financial point of view for holders of the Common Shares
of (a) the Company consummating the MRA Transactions and (b) the Company not
consummating the MRA Transactions, in each case making the PowerChoice
Assumption.
In connection with our opinion set forth in this letter, we have:
(i) Reviewed the financial terms and conditions of the PPAs prior to their
termination, restatement or amendment pursuant to the MRA, of the MRA
and of the PowerChoice Agreement (as it relates to the Rates and the
Genco Divestiture), and the Company's proposed financing of the MRA
Transactions;
(ii) Analyzed certain publicly available historical business and financial
information relating to the Company;
(iii) Reviewed various internal financial analyses and projections and other
data provided to us by the Company, including the Company's estimates
of future market prices for electricity, analyses and projections of
revenues and certain operating costs and financial savings expected to
be achieved as a result of the consummation of the MRA, and estimates
of the amount of proceeds expected to be received from the sale of
certain generating assets and the use of such proceeds as a result of
the PowerChoice Agreement;
D-1
<PAGE>
(iv) Participated in discussions with members of senior management of the
Company regarding the current and historical business operations,
financial condition and prospects of the Company and their analyses of
the financial and strategic benefits of the MRA and the PowerChoice
Agreement including, without limitation, the amount and timing of
realization of the savings and sales proceeds referred to in
subparagraph (iii) above;
(v) Participated in discussions with the Company's legal counsel concerning
legal, structural, regulatory and tax aspects of the MRA Transactions,
the PowerChoice Agreement and the PPAs;
(vi) Participated in discussions with the Company's independent auditors
concerning accounting and financial aspects of the MRA Transactions,
the PowerChoice Agreement and the PPAs; and
(vii) Conducted such other financial studies, analyses and investigations as
we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing
information and have not assumed any responsibility for any independent
verification of such information. With respect to financial forecasts, including
the Company's estimates of future market prices for electricity, the amount of
proceeds expected to be received from the Genco Divestiture and the proposed
application of such proceeds, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of management of the Company as to the future performance of the
Company and as to projected outcomes of legal, regulatory and other
contingencies. In addition, we have assumed that the benefits projected to be
realized from the MRA Transactions and the PowerChoice Agreement would be
realized substantially in accordance with such projections, both as to the
financial effect and timing thereof. We assume no responsibility for and express
no views as to the reasonableness of such forecasts or the assumptions on which
they are based, or of the other assumptions referred to in this letter, and we
have relied upon the assurances of management of the Company that they are
unaware of any facts that would make such forecasts or other information
provided to us incomplete or misleading. In rendering our opinion, we have
relied upon the advice of the Company and its legal counsel concerning the
expected time required to consummate the MRA Transactions and the Genco
Divestiture.
We have not performed any independent evaluations or appraisals of the
assets or liabilities of the Company, nor have we been furnished with any such
evaluations or appraisals. In addition, we express no opinion as to the price or
range of prices at which the Common Shares or any other securities of the
Company may trade subsequent to the consummation of the MRA Transactions or
otherwise, which may vary depending upon, among other factors, changes in the
operating activities and results of the Company, interest rates, dividend rates,
market conditions, general economic conditions and other factors that generally
influence the price of securities, as well as regulatory policies and the
uncertainties facing the electric utility industry as it transitions to
competition. Our opinion does not address the Company's underlying business
decision to terminate, restate or amend the PPAs pursuant to the MRA or the
business judgment of the Company's Board of Directors in entering into the MRA
(or the PowerChoice Agreement) or recommending it to the Company's shareholders.
Further, our opinion is necessarily based on economic, monetary, financial,
market, legislative, regulatory and other conditions in effect on, and the
information made available to us as of, the date hereof. In this regard, with
respect to the pricing and other terms of the debt financing to be incurred as
part of the MRA Transactions, we have assumed that such financing will be
obtained on terms currently available in the market to issuers that we believe
are comparable to the Company. There can be no assurance that such terms will be
available to the Company, or that any such debt financing will in fact be
available when it seeks financing.
In rendering our opinion, we have assumed that the MRA Transactions will be
consummated on the terms described in the MRA without any waiver, change or
modification of any material terms thereof that would have a material adverse
effect on the Company or the trading of the Common Shares. In particular, we
have assumed that the MRA Transactions will result in the creation of a
regulatory asset to be
D-2
<PAGE>
amortized over ten years under generally accepted accounting principals. In
addition, we have assumed that the Company will have recognized and deducted for
income tax purposes an amount representing the total compensation paid pursuant
to the MRA. This deduction will result in the creation of a net operating loss
which the Company will utilize over a short time period. We have also assumed
the absence of any change in the tax and other laws and regulations applicable
to the MRA Transactions in effect on the date hereof.
Our firm, as part of its investment banking services, is regularly engaged
in the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. We are currently acting as financial advisor to the Company and have
received, and will continue to receive, fees for such services. A significant
portion of our advisory fee is contingent upon the successful termination,
restatement or amendment of the Company's obligations under the PPAs pursuant to
the MRA or otherwise. In addition, we are currently acting as the lead managing
underwriter for a proposed issuance of debt securities that is part of the MRA
Transactions, and have agreed to provide other investment banking services to
the Company, and will receive customary commissions and fees in connection
therewith. Nothing herein, however, shall be deemed to obligate our firm to
purchase or place any securities of the Company, except to the extent such
obligations arise out of a definitive underwriting, purchase, placement or
similar agreement with respect to the MRA Transactions.
Our engagement and the opinion expressed herein are for the benefit of the
Board of Directors of the Company and our opinion is rendered in connection with
its consideration of the MRA Transactions. This opinion supersedes any prior
opinions delivered to the Board in respect of the MRA Transactions. This opinion
is not intended to and does not constitute a recommendation to any shareholder
of the Company as to whether such holder should vote to approve any of the
transactions contemplated by the MRA. It is understood that, except for
inclusion of this letter in its entirety in a proxy statement from the Company
to its shareholders, this letter may not be disclosed or otherwise referred to
without our prior written consent, except as may otherwise be required by law or
by a court of competent jurisdiction.
Based on and subject to the foregoing and such other factors as we have
deemed relevant, we are of the opinion that, as of the date hereof, the
consummation by the Company of the MRA Transactions would provide a higher
relative value from a financial point of view for the holders of Common Shares
than the failure of the Company to consummate the MRA Transactions, in each case
making the PowerChoice Assumption.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By /S/ MICHAEL RANGER
---------------------------------------------------------------------------
NAME: MICHAEL RANGER
TITLE: MANAGING DIRECTOR
D-3
<PAGE>
IMPORTANT
THE INTEREST AND COOPERATION OF ALL SHAREHOLDERS IN THE AFFAIRS OF THE
NIAGARA MOHAWK POWER CORPORATION ARE CONSIDERED TO BE OF THE GREATEST IMPORTANCE
BY YOUR MANAGEMENT. EVEN THOUGH YOU EXPECT TO ATTEND THE ANNUAL MEETING, IT IS
URGENTLY REQUESTED THAT, WHETHER YOUR COMMON STOCK SHARE HOLDINGS ARE LARGE OR
SMALL, YOU PROMPTLY FILL IN, DATE, SIGN AND RETURN THE ENCLOSED FORM OF PROXY IN
THE ENVELOPE PROVIDED HEREWITH. IF YOU DO ATTEND AND VOTE AT THE ANNUAL MEETING,
THAT VOTE WILL SUPERSEDE ANY EARLIER VOTE BY PROXY.
[LOGO]
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) Indemnification. Pursuant to Article Thirteen of Holdings' Certificate
of Incorporation, no director of Holdings shall have personal liability to
Holdings or its shareholders for damages for any breach of duty in such
capacity, except to the extent that such exemption is not permitted under the
BCL (presently, such exemption is not permitted for acts or omissions in bad
faith or involving intentional misconduct or a knowing violation of law, or if
such director personally gained in fact a financial profit or other advantage to
which such director was not legally entitled, or if such director's act violated
Section 719 of the BCL). Any amendment or repeal of such Article 13 may not
apply to or have any effect on the liability or alleged liability of any
director of Holdings for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
Section 6.6 of Holdings' by-laws provides that Holdings shall indemnify to
the full extent permitted by law any person made, or threatened to be made, a
party to any action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person or such person's
testator or intestate is or was a director, officer or employee of Holdings or
serves or served at the request of Holdings with any other enterprise as a
director, officer or employee; expenses incurred by any such person in defending
any such action, suit or proceeding shall be paid or reimbursed by Holdings
promptly upon receipt by it of an undertaking of such person to repay such
expenses if it shall ultimately be determined that such person is not entitled
to be indemnified by Holdings. No amendment of this by-law provision shall
impair the rights of any person arising at any time with respect to events
occurring prior to such amendment. In addition, Holdings intends to enter into
indemnification agreements with its officers and directors which provide for
indemnification to the maximum extent permitted by law. These agreements will
set forth certain procedures for the advancement by Holdings of certain expenses
to indemnities.
(b) Insurance. Holdings (with respect to indemnification liability) and its
directors and officers (in their capacities as such) are insured against
liability for wrongful acts (to the extent defined) under insurance policies.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed herewith.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
2(a) Agreement and Plan of Exchange (attached to Prospectus/Proxy Statement as Exhibit A).
3(a) Certificate of Incorporation of Niagara Mohawk Holdings, Inc. (attached to Prospectus/Proxy Statement as
Exhibit B).
3(b) By-Laws of Niagara Mohawk Holdings, Inc. (attached to Prospectus/ Proxy Statement as Exhibit C).
*3(c) Certificate of Incorporation of Niagara Mohawk Power Corporation (the "Company").
3(d) By-Laws of the Company (incorporated by reference as Exhibit 3(i) to the Company's Quarterly Report on
Form 10-Q for the period ended March 31, 1998).
5 Opinion of Sullivan & Cromwell.
8 Opinion of Bryan Cave LLP.
23(a) Consent of Sullivan & Cromwell (included in Exhibit 5).
23(b) Consents of Bryan Cave LLP (included in Exhibit 8).
23(c) Consent of Price Waterhouse LLP.
99(a) Form of Proxy Card.
99(b) Consents of persons to become directors of Niagara Mohawk Holdings, Inc. at the effective time of the
share exchange.
</TABLE>
- ------------------------
* Previously filed.
II-1
<PAGE>
(b) The financial statement schedules are incorporated by reference from
Niagara Mohawk's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(3) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
(4) To remove from registration by means of a post-effective amendment
any shares of Holdings common stock which are not issued in the share
exchange.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20, or otherwise (other
than by insurance), the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than under insurance
policies and other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SYRACUSE,
STATE OF NEW YORK ON THIS 19TH DAY OF MAY, 1998.
<TABLE>
<S> <C> <C>
NIAGARA MOHAWK HOLDINGS, INC.
By: /s/ WILLIAM F. EDWARDS
-----------------------------------------
NAME: William F. Edwards
TITLE: Chief Financial Officer
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED, ON MAY 19, 1998.
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ WILLIAM E. DAVIS
- ------------------------------ Chairman, Chief Executive
William E. Davis Officer and Director
/s/ ALBERT J. BUDNEY, JR.
- ------------------------------ President and Director
Albert J. Budney, Jr.
/s/ WILLIAM F. EDWARDS
- ------------------------------ Chief Financial Officer
William F. Edwards and Director
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
- ------------- ---------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
2(a) Agreement and Plan of Exchange (attached to Prospectus/Proxy Statement as Exhibit A).
3(a) Certificate of Incorporation of Niagara Mohawk Holdings, Inc. (attached to Prospectus/Proxy
Statement as Exhibit B).
3(b) By-Laws of Niagara Mohawk Holdings, Inc. (attached to Prospectus/ Proxy Statement as Exhibit
C).
*3(c) Certificate of Incorporation of Niagara Mohawk Power Corporation (the "Company").
3(d) By-Laws of the Company (incorporated by reference as Exhibit 3(i) to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1998).
5 Opinion of Sullivan & Cromwell.
8 Opinion of Bryan Cave LLP.
23(a) Consent of Sullivan & Cromwell (included in Exhibit 5).
23(b) Consents of Bryan Cave LLP (included in Exhibit 8).
23(c) Consent of Price Waterhouse LLP.
99(a) Form of Proxy Card.
99(b) Consents of persons to become directors of Niagara Mohawk Holdings, Inc. at the effective time
of the share exchange.
</TABLE>
* Previously filed.
<PAGE>
EXHIBIT 5
SULLIVAN & CROMWELL
125 Broad St.
New York, New York 10004
May 19, 1998
Niagara Mohawk Holdings, Inc.,
300 Erie Boulevard West,
Syracuse, New York 13202
Dear Sirs:
In connection with the registration under the Securities Act of 1933 (the
"Act") of 191,865,829 shares (the "Securities") of Common Stock, par value $0.01
per share, of Niagara Mohawk Holdings, Inc., a New York corporation (the
"Company"), we, as your counsel, have examined such corporate records,
certificates and other documents, and such questions of law, as we have
considered necessary or appropriate for the purposes of this opinion. Upon the
basis of such examination, we advise you that, in our opinion, (i) when the
registration statement relating to the Securities (the "Registration Statement")
has become effective under the Act, (ii) the Agreement and Plan of Exchange (the
"Exchange Agreement") attached as Exhibit A to the Prospectus/Proxy Statement
contained in the Registration Statement (the "Prospectus") has been duly adopted
by shareholders of Niagara Mohawk Power Corporation ("Niagara Mohawk") at
Niagara Mohawk's Annual Meeting to be held on June 23, 1998, (iii) all
conditions in the Exchange Agreement to the effectiveness of the share exchange
provided for therein have been satisfied, (iv) a Certificate of Exchange under
Section 913 of the New York Business Corporation Law has duly filed with the
Department of State of the State of New York, and (v) the Securities have been
duly issued and sold in the transactions contemplated by the Exchange Agreement
and the Prospectus, the Securities will be validly issued, fully paid, and
nonassessable.
<PAGE>
Niagara Mohawk Holdings, Inc. 2
The foregoing opinion is limited to the Federal laws of the United States
and the laws of the State of New York, and we are expressing no opinion as to
the effect of the laws of any other jurisdiction.
Also, we have relied as to certain matters on information obtained from
public officials, officers of the Company and other sources believed by us to be
responsible.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Validity of
Holdings Common Stock" in the Prospectus. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Act.
Very truly yours,
/s/ SULLIVAN & CROMWELL
<PAGE>
EXHIBIT 8
BRYAN CAVE LLP
700 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20005-5960
(202) 508-6000
FACSIMILE: (202) 508-5200
May 18, 1998
Mr. William F. Edwards
Senior Vice President & Chief
Financial Officer
Niagara Mohawk Power Corporation
300 Erie Boulevard West
Syracuse, New York 13202
Re: Holding Company Formation
Dear Mr. Edwards:
We have acted as special tax counsel to Niagara Mohawk Power
Corporation, a New York corporation (the "Company"), in connection with the
establishment of a holding company structure through an exchange of the
outstanding shares of the Company's Common Stock for shares of the Common
Stock of Niagara Mohawk Holdings, Inc. ("Holdings") (the "Share Exchange"),
as described in the Registration Statement (Form S-4, File No. 333-49769)
filed with the Securities & Exchange Commission on April 9, 1998 (the
"Registration Statement"). In connection therewith, you have requested our
opinion regarding whether the discussion of the federal income tax
consequences set forth in the Registration Statement under the caption
"Certain Federal Income Tax Consequences" fairly describes the material
federal income tax consequences of the Share Exchange. Except as otherwise
indicated herein, all capitalized terms used in this letter have the same
meaning assigned to them in the Registration Statement.
We have examined the Registration Statement, the Agreement and Plan of
Exchange and the Certificate of Incorporation of Holdings (which are attached to
the Registration Statement, respectively, as Exhibits A and B), and such other
documents as we have considered relevant for purposes of rendering this opinion.
We have assumed that the Registration Statement reflects all material facts and
other information relating to the Share Exchange. Our opinion is expressly
conditioned on the accuracy, as of the date hereof and on a continuing basis
through and after the effective date of the Share Exchange, of all such
information. Any material changes in such information could affect the
conclusions upon which our opinion is based.
We also have assumed the genuineness of all signatures, the legal capacity
of all natural persons, the authenticity of all documents submitted to us as
originals, the
<PAGE>
BRYAN CAVE LLP
Mr. William F. Edwards
May 18, 1998
Page 2
conformity to original documents of all documents submitted to us as certified
or photostatic copies, and the authenticity of the originals of such documents.
We have considered the applicable provisions of the Internal Revenue Code
of 1986, as amended, U.S. Treasury Regulations promulgated thereunder, Internal
Revenue Service rulings and other administrative pronouncements, pertinent
judicial authorities and such other authorities as we considered relevant to the
rendering of this opinion. It should be noted that statutory, administrative or
judicial authorities are subject to repeal, revocation, reversal, modification
or other change at any time, possibly with retroactive effect. A material
change in any of the authorities which we have considered could affect the
conclusions upon which our opinion is based.
Based solely upon and subject to the foregoing, it is our opinion that the
description contained in the Registration Statement under the capital "Certain
Federal Income Tax Consequences" fairly describes the material federal income
tax consequences of the Share Exchange.
Except as expressly set forth above, we express no other opinion with
respect to the Share Exchange or any other transactions or events relating
thereto. This opinion is being rendered exclusively for your respective use in
connection with the preparation and filing of the Registration Statement. It is
not to be used, circulated, quoted or otherwise referred to for any other
purpose. We hereby consent to the filing of this opinion as Exhibit 8 to the
Registration Statement and to the reference to us in the Registration Statement
under the caption "Certain Federal Income Tax Consequences". In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ Bryan Cave LLP
BRYAN CAVE LLP
<PAGE>
EXHIBIT 23(C)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Niagara Mohawk
Holdings, Inc. of our report dated March 26, 1998 appearing on page 53 of
Niagara Mohawk Power Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears on page 109 in such
Annual Report on Form 10-K. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Syracuse, New York
May 19, 1998
<PAGE>
(NM Logo)
x PLEASE FOLD AND TEAR HERE x
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR Proposals 1-4:
<TABLE>
<S> <C> <C>
1. Election of Directors to Class I: Salvatore H. Alfiero
Albert J. Budney, Jr.,
Dr. Bonnie G.Hill,
Clark A. Johnson
Henry A. Panasci, Jr.
/ / FOR all nominees / / WITHHELD from nominees / / FOR all nominees except:
</TABLE>
2. Issuance of up to 43 million shares of Common Stock to certain independent
power producers.
<TABLE>
<S> <C> <C>
/ / FOR / / ABSTAIN / / AGAINST
</TABLE>
3. Amendment of the Company's Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 185 million to 250 million.
<TABLE>
<S> <C> <C>
/ / FOR / / ABSTAIN / / AGAINST
</TABLE>
4. Adoption for an Agreement and Plan of Exchange to form a holding company.
<TABLE>
<S> <C> <C>
/ / FOR / / ABSTAIN / / AGAINST
</TABLE>
The Board of Directors recommends a vote AGAINST Proposals 5 and 6:
5. Shareholder proposal requesting the Corporation to endorse the CERES
Principles:
<TABLE>
<S> <C> <C>
/ / FOR / / ABSTAIN / / AGAINST
</TABLE>
6. Shareholder proposal recommending that, with respect to future contract
obligations, no salaries be increased or any stock options allowed until the
dividend is restored.
<TABLE>
<S> <C> <C>
/ / FOR / / ABSTAIN / / AGAINST
</TABLE>
7. To transact such other business as may properly come before the meeting.
(Continued--to be Dated and Signed on Other Side)
<PAGE>
(NM Logo)
x PLEASE FOLD AND TEAR HERE x
- -------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Niagara Mohawk Power Corporation
300 Erie Boulevard West, Syracuse, New York 13202
The undersigned hereby appoints William E. Davis, William F. Allyn, Donald
B. Riefler and Stephen B. Schwartz and each or any of them, proxies of the
undersigned, with power of substitution to represent and to vote, as designated
on the reverse side, and on any other business that may come before the meeting,
all the shares of Common Stock of the Corporation held of record by the
undersigned on May 7, 1998 at the Annual Meeting of Shareholders to be held on
June 23, 1998 and at any adjournment(s) hereof.
The shares represented by this proxy will be voted as indicated by the
undersigned (or, if no indication is given, for Proposals 1 through 4 and
against Proposals 5 and 6).
<TABLE>
<S> <C>
(Please sign exactly as name appears hereon. When
signing as attorney, executor, administrator, trustee,
guardian, etc., give full title as such.)
Dated ------------------------------------------, 1998
------------------------------------------------------
Signature
------------------------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY
IN THE ENCLOSED ENVELOPE
</TABLE>
<PAGE>
EXHIBIT 99(B)
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ SALVATORE H. ALFIERO
- ---------------------------------
Salvatore H. Alfiero
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ ALBERT J. BUDNEY, JR.
- ---------------------------------
Albert J. Budney, Jr.
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ DR. BONNIE GUITON HILL
- ---------------------------------
Dr. Bonnie Guiton Hill
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ HENRY A. PANASCI, JR.
- ---------------------------------
Henry A. Panasci, Jr.
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ WILLIAM F. ALLYN
- ---------------------------------
William F. Allyn
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ WILLIAM E. DAVIS
- ---------------------------------
William E. Davis
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ WILLIAM J. DONLON
- ---------------------------------
William J. Donlon
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ ANTHONY H. GIOIA
- ---------------------------------
Anthony H. Gioia
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ DR. PATTI MCGILL PETERSON
- ---------------------------------
Dr. Patti McGill Peterson
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ LAWRENCE BURKHARDT, III
- ---------------------------------
Lawrence Burkhardt, III
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ DOUGLAS M. COSTLE
- ---------------------------------
Douglas M. Costle
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ DONALD B. RIEFLER
- ---------------------------------
Donald B. Riefler
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ STEPHEN B. SCHWARTZ
- ---------------------------------
Stephen B. Schwartz
May 15, 1998
<PAGE>
CONSENT OF PERSON TO BECOME A DIRECTOR OF
NIAGARA MOHAWK HOLDINGS, INC.
AT THE EFFECTIVE TIME OF THE SHARE EXCHANGE
I hereby consent to the reference to my election as a director of
Niagara Mohawk Holdings, Inc. ("Holdings") in the Prospectus/Proxy Statement
constituting part of Holdings' Registration Statement on Form S-4.
/s/ CLARK A. JOHNSON
- ---------------------------------
Clark A. Johnson
May 15, 1998
