SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission Registrant, State of Incorporation I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ----------- ------------------------------------- ------------------
0-25595 NIAGARA MOHAWK HOLDINGS, INC. 16-1549726
(a New York corporation)
300 Erie Boulevard West
Syracuse, New York 13202
Telephone 315-474-1511
1-2987 NIAGARA MOHAWK POWER CORPORATION 15-0265555
(a New York corporation)
300 Erie Boulevard West
Syracuse, New York 13202
Telephone 315-474-1511
Indicate by check mark whether each registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares outstanding of each of the issuer's classes of voting
stock, as of July 31, 1999, were as follows:
Shares
Registrant Title Outstanding
- -------------------------------- ----------------------------- -----------
Niagara Mohawk Holdings, Inc. Common Stock, $0.01 par value 187,364,863
Niagara Mohawk Power Corporation Common Stock, $1.00 par value 187,364,863
(all held by Niagara Mohawk
Holdings, Inc.)
<PAGE>
FILING FORMAT
This Quarterly Report on Form 10-Q is a combined quarterly report being filed
separately by two registrants: Niagara Mohawk Holdings, Inc. ("Holdings") and
Niagara Mohawk Power Corporation ("Niagara Mohawk"). Holdings became the
holding company for Niagara Mohawk on March 18, 1999. (See Item 1. Financial
Statements - Notes to Consolidated Financial Statements - Note 1. Summary of
Significant Accounting Policies - "Formation of Holding Company"). Except where
the context clearly indicates otherwise, any references in this report to
"Holdings" includes all subsidiaries of Holdings including Niagara Mohawk.
Niagara Mohawk makes no representation as to the information contained in this
report in relation to Holdings and its subsidiaries other than Niagara Mohawk.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
FORM 10-Q - For the Quarter Ended June 30, 1999
PART I. FINANCIAL INFORMATION
Glossary of Terms
Item 1. Financial Statements
Consolidated Financial Statements:
NIAGARA MOHAWK HOLDINGS, INC.
-----------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
NIAGARA MOHAWK POWER CORPORATION
--------------------------------
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Review by Independent Accountants
Independent Accountants' Report on the Limited Review of the
Interim Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
GLOSSARY OF TERMS
TERM DEFINITION
- ---- ----------
CTC Competitive transition charges: a mechanism established in the
POWERCHOICE agreement to recover stranded costs from customers
Dth Dekatherm: one thousand cubic feet of gas with a heat content of
1,000 British Thermal Units per cubic foot
EBITDA Earnings before interest charges, interest income, income taxes,
depreciation and amortization, amortization of nuclear fuel,
allowance for funds used during construction, MRA regulatory
asset amortization, non-cash regulatory deferrals and other
amortizations, and extraordinary items (a non-GAAP measure of
cash flow)
FERC Federal Energy Regulatory Commission
GAAP Generally Accepted Accounting Principles
GRT Gross Receipts Tax
GWh Gigawatt-hour: one gigawatt-hour equals one billion watt-hours
IPP Independent Power Producer: any person that owns or operates, in
whole or in part, one or more Independent Power Facilities
IPP Party Independent Power Producers that were a party to the MRA
KWh Kilowatt-hour: a unit of electrical energy equal to one kilowatt
of power supplied or taken from an electric circuit steadily for
one hour
MRA Master Restructuring Agreement - an agreement, including
amendments thereto, which terminated, restated or amended certain
IPP Party power purchase agreements effective June 30, 1998
MRA Recoverable costs to terminate, restate or amend IPP Party
regulatory contracts, which have been deferred and are being amortized and
asset recovered under the POWERCHOICE agreement
MW Megawatt: one million watts
NRC Nuclear Regulatory Commission
POWERCHOICE Niagara Mohawk's five-year electric rate agreement, which
agreement incorporates the MRA, approved by the PSC in an order dated
March 20, 1998, and became effective September 1, 1998
PPA Power Purchase Agreement: long-term contracts under which a utility
is obligated to purchase electricity from an IPP at specified rates
PRP Potentially Responsible Party
PSC New York State Public Service Commission
SFAS Statement of Financial Accounting Standards No. 71
No. 71 "Accounting for the Effects of Certain Types of Regulation"
SFAS Statement of Financial Accounting Standards No. 121
No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of"
TPA Transition Power Agreement: contracts entered into with the
purchasers of Niagara Mohawk's generation assets, for the purchase
of energy and capacity with varying terms and conditions
Unit 1 Nine Mile Point Nuclear Station Unit No. 1
Unit 2 Nine Mile Point Nuclear Station Unit No. 2
<PAGE>
PART I
------
ITEM 1. FINANCIAL STATEMENTS
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
--------------- --------------- ----------- -----------
(in thousands of dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric . . . . . . . . . . . . . . . . . . . $ 786,509 $ 808,509 $1,651,187 $1,722,030
Gas. . . . . . . . . . . . . . . . . . . . . . 127,804 136,057 382,211 386,214
Other. . . . . . . . . . . . . . . . . . . . . 8 118 57 337
--------------- -------------- ----------- -----------
914,321 944,684 2,033,455 2,108,581
--------------- -------------- ----------- -----------
OPERATING EXPENSES:
Fuel for electric generation . . . . . . . . . 47,010 51,190 104,104 98,388
Electricity purchased. . . . . . . . . . . . . 219,787 338,001 395,079 712,920
Gas purchased. . . . . . . . . . . . . . . . . 56,526 69,403 171,784 200,076
Other operation and maintenance expenses . . . 219,947 214,128 426,290 478,447
Amortization of MRA regulatory asset . . . . . 96,624 - 193,249 -
POWERCHOICE charge . . . . . . . . . . . . . . - 263,227 - 263,227
Depreciation and amortization. . . . . . . . . 94,109 87,951 188,925 176,010
Other taxes. . . . . . . . . . . . . . . . . . 99,165 114,322 221,023 241,482
--------------- -------------- ----------- -----------
833,168 1,138,222 1,700,454 2,170,550
--------------- ------------- ----------- ------------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . . 81,153 (193,538) 333,001 (61,969)
Other income (deductions). . . . . . . . . . . . . . (2,011) 11,085 (3,414) 18,038
--------------- ------------- ----------- ------------
INCOME (LOSS) BEFORE INTEREST CHARGES. . . . . . . . 79,142 (182,453) 329,587 (43,931)
Interest charges . . . . . . . . . . . . . . . . . . 129,960 65,861 260,235 131,451
Preferred dividend requirement of subsidiary . . . . 9,024 9,171 18,048 18,394
--------------- -------------- ----------- -----------
INCOME (LOSS) BEFORE FEDERAL AND FOREIGN
INCOME TAXES. . . . . . . . . . . . . . . . . . . (59,842) (257,485) 51,304 (193,776)
Federal and foreign income taxes . . . . . . . . . . (34,545) (106,906) 25,769 (54,337)
--------------- -------------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. . . . . . . (25,297) (150,579) 25,535 (139,439)
Extraordinary item - Loss from the extinguishment
of debt, net of income taxes of $5,789 (Note 5) . (10,750) - (10,750) -
--------------- ------------- ----------- ------------
NET INCOME (LOSS) (NOTE 1) . . . . . . . . . . . . . $ (36,047) $ (150,579) $ 14,785 $ (139,439)
=============== ============== =========== ===========
Average number of shares of common stock
outstanding (in thousands). . . . . . . . . . . . 187,365 144,891 187,365 144,657
BASIC AND DILUTED EARNINGS (LOSS) PER AVERAGE SHARE
OF COMMON STOCK BEFORE EXTRAORDINARY ITEM . . . . $ (0.13) $ (1.04) $ 0.14 $ (0.96)
EXTRAORDINARY ITEM PER AVERAGE SHARE OF
COMMON STOCK. . . . . . . . . . . . . . . . . . . (0.06) - (0.06) -
--------------- -------------- ----------- -----------
BASIC AND DILUTED EARNINGS (LOSS) PER AVERAGE
SHARE OF COMMON STOCK . . . . . . . . . . . . . . $ (0.19) $ (1.04) $ 0.08 $ (0.96)
=============== ============== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1999 December 31,
(UNAUDITED) 1998
----------- -------------
(in thousands of dollars)
<S> <C> <C>
UTILITY PLANT:
Electric plant. . . . . . . . . . . . . . . . . . $ 8,289,911 $ 8,826,650
Nuclear fuel. . . . . . . . . . . . . . . . . . . 627,785 604,213
Gas plant . . . . . . . . . . . . . . . . . . . . 1,232,625 1,179,716
Common plant. . . . . . . . . . . . . . . . . . . 360,069 349,066
Construction work-in-progress . . . . . . . . . . 335,559 471,802
----------- -------------
Total utility plant . . . . . . . . . 10,845,949 11,431,447
Less - Accumulated depreciation and amortization. 4,369,074 4,553,488
----------- -------------
Net utility plant . . . . . . . . . . 6,476,875 6,877,959
----------- -------------
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . 383,371 411,106
----------- -------------
CURRENT ASSETS:
Cash, including temporary cash investments
of $549,621 and $122,837, respectively . . . . 576,894 172,998
Funds held by trustee for refunding of debt . . . 158,805 -
Account receivable (less allowance for doubtful
accounts of $60,100 and $47,900, respectively) 524,074 427,588
Materials and supplies, at average cost:
Coal and oil for production of electricity . . 20,542 42,299
Gas storage. . . . . . . . . . . . . . . . . . 28,064 38,803
Other. . . . . . . . . . . . . . . . . . . . . 98,323 118,855
Refundable Federal income taxes . . . . . . . . . - 130,411
Prepaid taxes . . . . . . . . . . . . . . . . . . 62,505 17,282
Other . . . . . . . . . . . . . . . . . . . . . . 20,367 22,208
----------- -------------
1,489,574 970,444
----------- -------------
REGULATORY ASSETS (NOTE 3):
MRA regulatory asset. . . . . . . . . . . . . . . 3,865,556 4,045,647
Swap contract regulatory asset. . . . . . . . . . 593,609 535,000
Regulatory tax asset. . . . . . . . . . . . . . . 425,898 425,898
Deferred loss on sale of assets . . . . . . . . . 21,659 -
Deferred environmental restoration costs (Note 2). 220,000 220,000
Unamortized debt expense. . . . . . . . . . . . . 48,757 51,922
Postretirement benefits other than pensions . . . 50,819 52,701
Other . . . . . . . . . . . . . . . . . . . . . . 154,492 137,061
----------- -------------
5,380,790 5,468,229
----------- -------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . 117,627 133,449
----------- -------------
$13,848,237 $ 13,861,187
=========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1999 December 31,
(UNAUDITED) 1998
----------- ------------
(in thousands of dollars)
<S> <C> <C>
CAPITALIZATION (NOTE 1):
COMMON STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value; authorized
300,000,000 shares; issued 187,364,863 . . . . . . $ 1,874 $ -
Common stock of Niagara Mohawk - $1.00 par value;
authorized 250,000,000 shares; issued 187,364,863. - 187,365
Capital stock premium and expense . . . . . . . . . . 2,548,030 2,362,531
Accumulated other comprehensive income. . . . . . . . (27,088) (25,794)
Retained earnings . . . . . . . . . . . . . . . . . . 660,825 646,040
------------ --------------
3,183,641 3,170,142
PREFERRED STOCK OF SUBSIDIARY:
Not subject to mandatory redemption . . . . . . . . . 440,000 440,000
Subject to mandatory redemption . . . . . . . . . . . 67,190 68,990
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . 5,885,044 6,417,225
------------ --------------
TOTAL CAPITALIZATION . . . . . . . . . . . . . 9,575,875 10,096,357
------------ --------------
CURRENT LIABILITIES:
Long-term debt due within one year . . . . . . . . . . . . . 730,247 312,240
Sinking fund requirements on redeemable preferred
stock of subsidiary. . . . . . . . . . . . . . . . . . . 7,620 7,620
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 184,797 197,124
Payable on outstanding bank checks . . . . . . . . . . . . . 27,132 39,306
Customers' deposits. . . . . . . . . . . . . . . . . . . . . 15,001 17,148
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . 71,563 6,254
Accrued interest . . . . . . . . . . . . . . . . . . . . . . 126,562 132,236
Accrued vacation pay . . . . . . . . . . . . . . . . . . . . 38,837 38,727
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,942 91,877
------------ --------------
1,269,701 842,532
------------ --------------
REGULATORY AND OTHER LIABILITIES (NOTE 3):
Accumulated deferred income taxes. . . . . . . . . . . . . . 1,518,283 1,511,417
Liability for swap contracts . . . . . . . . . . . . . . . . 750,749 693,363
Employee pension and other benefits. . . . . . . . . . . . . 243,185 235,376
Unbilled gas revenues. . . . . . . . . . . . . . . . . . . . 11,452 30,652
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 258,992 231,490
------------ --------------
2,782,661 2,702,298
------------ --------------
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3):
Liability for environmental restoration. . . . . . . . . . . 220,000 220,000
------------ --------------
$13,848,237 $ 13,861,187
============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
-------------- ------------
(in thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ 14,785 $ (139,439)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
POWERCHOICE charge. . . . . . . . . . . . . . . . . . . . . - 263,227
Depreciation and amortization . . . . . . . . . . . . . . . 188,925 175,773
Amortization of MRA regulatory asset. . . . . . . . . . . . 193,249 -
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 13,549 12,975
Extraordinary loss on extinguishment of debt, net of taxes. 10,750 -
Provision for deferred income taxes . . . . . . . . . . . . 6,866 (46,940)
Net accounts receivable . . . . . . . . . . . . . . . . . . (115,686) 144,387
Materials and supplies. . . . . . . . . . . . . . . . . . . 44,815 16,718
Accounts payable and accrued expenses . . . . . . . . . . . (21,230) (5,394)
Accrued interest and taxes. . . . . . . . . . . . . . . . . 59,635 74,599
MRA regulatory asset. . . . . . . . . . . . . . . . . . . . 232 (3,944,015)
Deferral of MRA interest rate savings . . . . . . . . . . . 16,804 -
Refundable income taxes . . . . . . . . . . . . . . . . . . 130,411 -
Changes in other assets and liabilities . . . . . . . . . . (75,507) (59,206)
-------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . 467,598 (3,507,315)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction additions . . . . . . . . . . . . . . . . . . . . . . (110,839) (200,642)
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,572) (21,479)
-------------- ------------
Acquisition of utility plant. . . . . . . . . . . . . . . . . . (134,411) (222,121)
Materials and supplies related to construction . . . . . . . . . . 8,213 (1,078)
Accounts payable and accrued expenses related to construction. . . (5,307) (1,349)
Proceeds from the sale of generation assets. . . . . . . . . . . . 355,000 -
Other investments. . . . . . . . . . . . . . . . . . . . . . . . . 28,217 53,459
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,932 (1,823)
-------------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . 256,644 (172,912)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds held by trustee for refunding of debt. . . . . . . . . . . . (158,805) -
Reduction in preferred stock of subsidiary . . . . . . . . . . . . (1,800) (4,300)
Reduction in long-term debt. . . . . . . . . . . . . . . . . . . . (155,020) (3,300)
Issuance of senior notes . . . . . . . . . . . . . . . . . . . . . - 3,268,528
Issuance of Niagara Mohawk common stock. . . . . . . . . . . . . . - 316,389
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,721) (12,611)
-------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . (320,346) 3,564,706
-------------- ------------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . 403,896 (115,521)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . 172,998 378,232
-------------- ------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . $ 576,894 $ 262,711
============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 247,507 $ 140,670
Income taxes paid (refunded). . . . . . . . . . . . . . . . . . $ (126,584) $ (7,840)
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Niagara Mohawk issued 20,546,264 shares of common stock, valued at $14.75 per share to
the IPP Parties on June 30,1998 or $303.1 million.
On March 18, 1999, Holdings issued 187,364,863 shares of common stock in a share-for-share
exchange for Niagara Mohawk's outstanding common stock.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------------- ------------- ----------- -----------
(in thousands of dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric . . . . . . . . . . . . . . . . . . $ 747,886 $ 783,282 $1,597,632 $1,646,451
Gas. . . . . . . . . . . . . . . . . . . . . 122,575 127,624 368,850 362,859
-------------- ------------- ----------- -----------
870,461 910,906 1,966,482 2,009,310
-------------- ------------- ----------- -----------
OPERATING EXPENSES:
Fuel for electric generation . . . . . . . . 47,010 51,190 104,104 98,388
Electricity purchased. . . . . . . . . . . . 183,359 302,259 344,324 626,609
Gas purchased. . . . . . . . . . . . . . . . 51,414 61,160 158,760 176,612
Other operation and maintenance expenses . . 216,622 211,944 419,914 474,306
Amortization of MRA regulatory asset . . . . 96,624 - 193,249 -
POWERCHOICE charge . . . . . . . . . . . . . - 263,227 - 263,227
Depreciation and amortization. . . . . . . . 93,979 87,823 188,671 175,773
Other taxes. . . . . . . . . . . . . . . . . 98,989 114,127 220,712 240,922
-------------- ------------- ----------- -----------
787,997 1,091,730 1,629,734 2,055,837
-------------- ------------- ----------- -----------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . 82,464 (180,824) 336,748 (46,527)
Other income (deductions). . . . . . . . . . . . . (4,068) (1,629) (7,907) 2,596
-------------- ------------- ----------- -----------
INCOME (LOSS) BEFORE INTEREST CHARGES. . . . . . . 78,396 (182,453) 328,841 (43,931)
Interest charges . . . . . . . . . . . . . . . . . 129,960 65,861 260,235 131,451
-------------- ------------- ----------- -----------
INCOME (LOSS) BEFORE FEDERAL AND FOREIGN
INCOME TAXES. . . . . . . . . . . . . . . . . . (51,564) (248,314) 68,606 (175,382)
Federal and foreign income taxes . . . . . . . . . (34,651) (106,906) 25,663 (54,337)
-------------- ------------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. . . . . . (16,913) (141,408) 42,943 (121,045)
Extraordinary item - Loss from the extinguishment
of debt, net of income taxes of $5,789 (Note 5) (10,750) - (10,750) -
-------------- ------------- ----------- -----------
NET INCOME (LOSS) (NOTE 1) . . . . . . . . . . . . (27,663) (141,408) 32,193 (121,045)
Dividends on preferred stock . . . . . . . . . . . 9,024 9,171 18,048 18,394
-------------- ------------- ----------- -----------
BALANCE AVAILABLE FOR COMMON STOCK . . . . . . . . $ (36,687) $ (150,579) $ 14,145 $ (139,439)
============== ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1999 December 31,
(UNAUDITED) 1998
----------- --------------
(in thousands of dollars)
<S> <C> <C>
UTILITY PLANT:
Electric plant. . . . . . . . . . . . . . . . . . $ 8,289,911 $ 8,826,650
Nuclear fuel. . . . . . . . . . . . . . . . . . . 627,785 604,213
Gas plant . . . . . . . . . . . . . . . . . . . . 1,232,625 1,179,716
Common plant. . . . . . . . . . . . . . . . . . . 360,069 349,066
Construction work-in-progress . . . . . . . . . . 335,559 471,802
----------- -------------
Total utility plant . . . . . . . . . 10,845,949 11,431,447
Less - Accumulated depreciation and amortization. 4,369,074 4,553,488
----------- -------------
Net utility plant . . . . . . . . . . 6,476,875 6,877,959
----------- -------------
OTHER PROPERTY AND INVESTMENTS . . . . . . . . . . . 334,286 411,106
----------- -------------
CURRENT ASSETS:
Cash, including temporary cash investments
of $459,015 and $122,837, respectively . . . . 485,871 172,998
Funds held by trustee for refunding of debt . . . 158,805 -
Account receivable (less allowance for doubtful
accounts of $58,200 and $47,900, respectively) 500,183 427,588
Materials and supplies, at average cost:
Coal and oil for production of electricity . . 20,542 42,299
Gas storage. . . . . . . . . . . . . . . . . . 27,433 38,803
Other. . . . . . . . . . . . . . . . . . . . . 98,323 118,855
Refundable taxes. . . . . . . . . . . . . . . . . - 130,411
Prepaid taxes . . . . . . . . . . . . . . . . . . 62,505 17,282
Other . . . . . . . . . . . . . . . . . . . . . . 17,120 22,208
----------- -------------
1,370,782 970,444
----------- -------------
REGULATORY ASSETS (NOTE 3):
MRA regulatory asset. . . . . . . . . . . . . . . 3,865,556 4,045,647
Swap contract regulatory asset. . . . . . . . . . 593,609 535,000
Regulatory tax asset. . . . . . . . . . . . . . . 425,898 425,898
Deferred loss on sale of assets . . . . . . . . . 21,659 -
Deferred environmental restoration costs (Note 2) 220,000 220,000
Unamortized debt expense. . . . . . . . . . . . . 48,757 51,922
Postretirement benefits other than pensions . . . 50,819 52,701
Other . . . . . . . . . . . . . . . . . . . . . . 154,492 137,061
----------- -------------
5,380,790 5,468,229
----------- -------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . 116,901 133,449
----------- -------------
$13,679,634 $ 13,861,187
=========== =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1999 December 31,
(UNAUDITED) 1998
----------- -------------
(in thousands of dollars)
<S> <C> <C>
CAPITALIZATION:
COMMON STOCKHOLDERS' EQUITY:
Common stock of Niagara Mohawk - $1.00 par value;
authorized 250,000,000 shares; issued 187,364,863 . . . . . . . $ 187,365 $ 187,365
Capital stock premium and expense. . . . . . . . . . . . . . . . . 2,362,539 2,362,531
Accumulated other comprehensive income . . . . . . . . . . . . . . (4,029) (25,794)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . 485,719 646,040
------------ --------------
3,031,594 3,170,142
------------ --------------
CUMULATIVE PREFERRED STOCK, AUTHORIZED 3,400,000 SHARES, $100 PAR VALUE:
Non-redeemable (optionally redeemable), issued 2,100,000 shares. . 210,000 210,000
Redeemable (mandatorily redeemable), issued 186,000 shares . . . . 16,800 18,600
and 204,000 shares, respectively
CUMULATIVE PREFERRED STOCK, AUTHORIZED 19,600,000 SHARES, $25 PAR VALUE:
Non-redeemable (optionally redeemable), issued 9,200,000 shares. . 230,000 230,000
Redeemable (mandatorily redeemable), issued 2,248,403 shares . . . 50,390 50,390
------------ --------------
507,190 508,990
------------ --------------
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,885,044 6,417,225
------------ --------------
TOTAL CAPITALIZATION. . . . . . . . . . . . . . . . . . . . 9,423,828 10,096,357
------------ --------------
CURRENT LIABILITIES:
Long-term debt due within one year. . . . . . . . . . . . . . . . . . . . 730,247 312,240
Sinking fund requirements on redeemable preferred stock . . . . . . . . . 7,620 7,620
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,929 197,124
Payable on outstanding bank checks. . . . . . . . . . . . . . . . . . . . 27,132 39,306
Customers' deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,001 17,148
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,343 6,254
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,562 132,236
Accrued vacation pay. . . . . . . . . . . . . . . . . . . . . . . . . . . 38,837 38,727
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,900 91,877
------------ --------------
1,247,571 842,532
------------ --------------
REGULATORY AND OTHER LIABILITIES (NOTE 3):
Accumulated deferred income taxes . . . . . . . . . . . . . . . . . . . . 1,523,877 1,511,417
Liability for swap contracts. . . . . . . . . . . . . . . . . . . . . . . 750,749 693,363
Employee pension and other benefits . . . . . . . . . . . . . . . . . . . 243,185 235,376
Unbilled gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 11,452 30,652
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258,972 231,490
------------ --------------
2,788,235 2,702,298
------------ --------------
COMMITMENTS AND CONTINGENCIES (NOTES 2 AND 3):
Liability for environmental restoration . . . . . . . . . . . . . . . . . 220,000 220,000
------------ --------------
$13,679,634 $ 13,861,187
============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
-------------- ------------
(in thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . $ 32,193 $ (121,045)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
POWERCHOICE charge. . . . . . . . . . . . . . . . . . . . . - 263,227
Depreciation and amortization . . . . . . . . . . . . . . . 188,671 175,773
Amortization of MRA regulatory asset. . . . . . . . . . . . 193,249 -
Amortization of nuclear fuel. . . . . . . . . . . . . . . . 13,549 12,975
Extraordinary loss on extinguishment of debt, net of taxes. 10,750 -
Provision for deferred income taxes . . . . . . . . . . . . 6,864 (46,940)
Net accounts receivable . . . . . . . . . . . . . . . . . . (103,478) 144,387
Materials and supplies. . . . . . . . . . . . . . . . . . . 45,087 16,718
Accounts payable and accrued expenses . . . . . . . . . . . (28,779) (5,394)
Accrued interest and taxes. . . . . . . . . . . . . . . . . 56,272 74,599
MRA regulatory asset. . . . . . . . . . . . . . . . . . . . 232 (3,944,015)
Deferral of MRA interest rate savings . . . . . . . . . . . 16,804 -
Refundable income taxes . . . . . . . . . . . . . . . . . . 130,411 -
Changes in other assets and liabilities . . . . . . . . . . (74,801) (59,206)
--------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . 487,024 (3,488,921)
--------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction additions . . . . . . . . . . . . . . . . . . . . . . (110,839) (200,642)
Nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,572) (21,479)
---------------- ------------
Acquisition of utility plant. . . . . . . . . . . . . . . . . . (134,411) (222,121)
Materials and supplies related to construction . . . . . . . . . . 8,213 (1,078)
Accounts payable and accrued expenses related to construction. . . (7,195) (1,349)
Proceeds from the sale of generation assets. . . . . . . . . . . . 355,000 -
Other investments. . . . . . . . . . . . . . . . . . . . . . . . . 59,193 53,459
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,060 (1,823)
--------------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . 283,860 (172,912)
---------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds held by trustee for refunding of debt. . . . . . . . . . . . (158,805) -
Reductions in long-term debt . . . . . . . . . . . . . . . . . . . (155,020) (3,300)
Reduction in preferred stock . . . . . . . . . . . . . . . . . . . (1,800) (4,300)
Corporate restructuring to establish holding company . . . . . . . (89,618) -
Preferred dividends paid . . . . . . . . . . . . . . . . . . . . . (18,048) (18,394)
Common stock dividend paid to Holdings . . . . . . . . . . . . . . (30,000) -
Issuance of senior notes . . . . . . . . . . . . . . . . . . . . . - 3,268,528
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . - 316,389
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,720) (12,611)
--------------- ------------
NET CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES. . (458,011) 3,546,312
--------------- ------------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . 312,873 (115,521)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . 172,998 378,232
---------------- ------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . $ 485,871 $ 262,711
=============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 247,507 $ 140,670
Income taxes paid (refunded). . . . . . . . . . . . . . . . . . $ (127,299) $ (7,840)
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
On March 18, 1999, Niagara Mohawk's outstanding common stock was exchanged on a
share-by-share basis for Holdings' common stock.
On March 31, 1999, Niagara Mohawk distributed the stock of Opinac as a dividend to Holdings,
which included cash of $89.6 million.
Niagara Mohawk issued 20,546,264 shares of common stock, valued at $14.75 per share to
the IPP Parties on June 30, 1998 or $303.1 million.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HOLDING COMPANY FORMATION: On March 18, 1999, Niagara Mohawk Power Corporation
("Niagara Mohawk") was reorganized into a holding company structure in
accordance with its Agreement and Plan of Exchange between Niagara Mohawk and
Niagara Mohawk Holdings, Inc. ("Holdings"). Niagara Mohawk's outstanding common
stock was exchanged on a share-for-share basis for Holdings' common stock.
Niagara Mohawk's preferred stock was not exchanged as part of the share exchange
and will continue as shares of Niagara Mohawk.
SUBSIDIARIES: On March 31, 1999, Niagara Mohawk distributed its ownership in the
stock of Opinac North America, Inc. ("Opinac") as a dividend to Holdings. As a
result, the net assets and accumulated other comprehensive income of Opinac are
no longer included in Niagara Mohawk's consolidated balance sheet as of June 30,
1999. The dividend completed the holding company structure, with Holdings
owning the stock of its two subsidiaries, Niagara Mohawk and Opinac. Niagara
Mohawk and its subsidiaries manage all regulated activities and comprise 99
percent of the assets and 97 percent of the revenues of Holdings. Opinac and
its subsidiaries manage all other activities including an energy marketing
company and investments in energy related services.
BASIS OF PRESENTATION: This Quarterly Report on Form 10-Q is a combined report
of Holdings and Niagara Mohawk, a regulated electric and gas utility subsidiary.
The Notes to the Consolidated Financial Statements apply to both Holdings and
Niagara Mohawk. Holdings' consolidated financial statements include the
accounts of Holdings and its wholly owned subsidiaries, including Niagara
Mohawk. Niagara Mohawk's consolidated financial statements include it
accounts as well as those of its wholly owned subsidiaries.
Holdings' prior period consolidated financial statements have been prepared from
Niagara Mohawk's prior period consolidated financial statements, except that
accounts have been reclassified to reflect Holdings' structure.
Holdings and Niagara Mohawk, in the opinion of management, have included all
adjustments (which include normal recurring adjustments) necessary for a fair
statement of the results of operations for the interim periods presented. These
financial statements for 1999 are subject to adjustment at the end of the year
when they will be audited by independent accountants. These financial
statements and notes thereto should be read in conjunction with the audited
financial statements included in Niagara Mohawk's 1998 Annual Report on Form
10-K.
Niagara Mohawk's electric sales tend to be substantially higher in summer and
winter months as related to weather patterns in its service territory; gas sales
tend to peak in the winter. Notwithstanding other factors, Niagara Mohawk's
quarterly net income will generally fluctuate accordingly. Therefore, the
earnings for the three-month and six-month periods ended June 30, 1999 should
not be taken as an indication of earnings for all or any part of the balance of
the year. The closing of the MRA, which occurred on June 30, 1998, and the
implementation of POWERCHOICE on September 1, 1998 have depressed and will
continue to substantially depress earnings during the five-year term of
POWERCHOICE. However, operating cash flows have substantially improved. Also
affecting comparability of the financial statements is the closing on the sale
of Niagara Mohawk's coal-fired generation plants on June 11, 1999. See Note 3.
Rate and Regulatory Issues and Contingencies for a further discussion of the
sale.
COMPREHENSIVE INCOME: Comprehensive income is the change in the equity of a
company, not including those changes that result from shareholder transactions.
While the primary component of comprehensive income is reported net income or
loss, the other components of comprehensive income relate to foreign currency
translation adjustments, additional minimum pension liability recognition and
unrealized gains and losses associated with certain investments held as
available for sale. The primary difference in comprehensive income between
Holdings and Niagara Mohawk is the treatment of Niagara Mohawk's preferred
dividends and reported net income or loss. Total comprehensive income (loss)
for the three months and six months ended June 30, 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
Company: 1999 1998 1999 1998
- ---------------------------- --------- --------- ------- --------
(in millions of dollars)
<S> <C> <C> <C> <C>
Holdings. . . . . . . . . $ (33.4) $ (150.0) $13.5 $(137.5)
Niagara Mohawk. . . . . . (27.2) (140.8) 28.8 (119.1)
</TABLE>
NEW ACCOUNTING STANDARD: In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities." The new standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from the changes in the
values of the derivatives will be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. Holdings and Niagara
Mohawk will be required to adopt this standard in 2001. Niagara Mohawk has
identified swap contracts, entered into as part of the MRA and generating asset
sales agreements, as derivative instruments and has recorded a liability at fair
value under SFAS No. 80, "Accounting for Futures Contracts." These swap
contracts qualify as hedges of future purchase commitments and will continue to
qualify as hedges under SFAS No. 133. See Note 3. Rate and Regulatory Issues
and Contingencies for additional discussion of the accounting for the swap
contracts. Holdings and Niagara Mohawk continue to assess the applicability of
this new standard to other contractual obligations.
NOTE 2. CONTINGENCIES
ENVIRONMENTAL ISSUES: The public utility industry typically utilizes and/or
generates in its operations a broad range of hazardous and potentially hazardous
wastes and by-products. Niagara Mohawk believes it is handling identified
wastes and by-products in a manner consistent with federal, state and local
requirements and has implemented an environmental audit program to identify any
potential areas of concern and aid in compliance with such requirements.
Niagara Mohawk is also currently conducting a program to investigate and
remediate, as necessary, to meet current environmental standards, certain
properties associated with former gas manufacturing and other properties which
Niagara Mohawk has learned may be contaminated with industrial waste, as well as
investigating identified industrial waste sites as to which it may be determined
that Niagara Mohawk has contributed. Niagara Mohawk has also been advised that
various federal, state or local agencies believe certain properties require
investigation and has prioritized the sites based on available information in
order to enhance the management of investigation and remediation, if necessary.
Niagara Mohawk is currently aware of 137 sites with which it has been or may be
associated, including 85 which are Niagara Mohawk-owned. With respect to
non-owned sites, Niagara Mohawk may be required to contribute some proportionate
share of remedial costs. Although one party can, as a matter of law, be held
liable for all of the remedial costs at a site, regardless of fault, in
practice, costs are usually allocated among PRPs. Niagara Mohawk has denied any
responsibility at certain of these PRP sites and is contesting liability
accordingly.
Investigations at each of the Niagara Mohawk-owned sites are designed to (1)
determine if environmental contamination problems exist; (2) if necessary,
determine the appropriate remedial actions; and (3) where appropriate, identify
other parties who should bear some or all of the cost of remediation. Legal
action against such other parties will be initiated where appropriate. After
site investigations are completed, Niagara Mohawk expects to determine
site-specific remedial actions and to estimate the attendant costs for
restoration. However, since investigations are ongoing for most sites, the
estimated cost of remedial action is subject to change.
Estimates of the cost of remediation and post-remedial monitoring are based upon
a variety of factors, including identified or potential contaminants; location,
size and use of the site; proximity to sensitive resources; status of regulatory
investigation and knowledge of activities at similarly situated sites.
Additionally, Niagara Mohawk's estimating process includes an initiative where
these factors are developed and reviewed using direct input and support obtained
from the New York State Department of Environmental Conservation ("DEC").
Actual Niagara Mohawk expenditures are dependent upon the total cost of
investigation and remediation and the ultimate determination of Niagara Mohawk's
share of responsibility for such costs, as well as the financial viability of
other identified responsible parties since clean-up obligations are joint and
several. Niagara Mohawk has denied any responsibility at certain of these PRP
sites and is contesting liability accordingly.
As a consequence of site characterizations and assessments completed to date and
negotiations with PRPs, Niagara Mohawk has accrued a liability in the amount of
$220 million, which is reflected in Niagara Mohawk's and Holdings' Consolidated
Balance Sheets at June 30, 1999 and December 31, 1998. The potential high end
of the range is presently estimated at approximately $750 million, including
approximately $340 million in the unlikely event Niagara Mohawk is required to
assume 100% responsibility at non-owned sites. The amount accrued at June 30,
1999 and December 31, 1998 incorporates a method to estimate the liability for
22 of Niagara Mohawk's largest sites, which relies upon a decision analysis
approach. This method includes developing several remediation approaches for
each of the 22 sites, using the factors previously described, and then assigning
a probability to each approach. The probability represents Niagara Mohawk's
best estimate of the likelihood of the approach occurring using input received
directly from the DEC. The probable costs for each approach are then calculated
to arrive at an expected value. While this approach calculates a range of
outcomes for each site, Niagara Mohawk has accrued the sum of the expected
values for these sites. The amount accrued for Niagara Mohawk's remaining sites
is determined through feasibility studies or engineering estimates, Niagara
Mohawk's estimated share of a PRP allocation or where no better estimate is
available, the low end of a range of possible outcomes is used. In addition,
Niagara Mohawk has recorded a regulatory asset representing the remediation
obligations to be recovered from ratepayers. POWERCHOICE provides for the
continued application of deferral accounting for expense recognition resulting
from this effort.
In October 1997, Niagara Mohawk submitted a draft feasibility study to the DEC,
which included Niagara Mohawk's Harbor Point site and five surrounding non-owned
sites. The study indicates a range of viable remedial approaches and associated
cost estimates, however, a final determination has not been made concerning the
remedial approach to be taken. This range consists of a low end of $21 million
and a high end of $360 million, with an expected value calculation of $56
million, which is included in the amounts accrued at June 30, 1999 and December
31, 1998. The range represents the total costs to remediate the properties and
does not consider contributions from other PRPs, the amount of which Niagara
Mohawk is unable to estimate. Niagara Mohawk has received comments from the DEC
on the draft feasibility study, which will facilitate completion of the
feasibility study phase by the end of 1999. At this time, Niagara Mohawk cannot
predict the nature of the DEC proposed remedial action plan or the range of
remediation costs the DEC will require. While Niagara Mohawk does not expect to
be responsible for the entire cost to remediate these properties, it is not
possible at this time to determine its share of the cost of remediation.
In May 1995, Niagara Mohawk filed a complaint, pursuant to applicable Federal
and New York State law, in the U.S. District Court for the Northern District of
New York against several defendants seeking recovery of past and future costs
associated with the investigation and remediation of the Harbor Point and
surrounding sites. The New York State Attorney General moved to dismiss Niagara
Mohawk's claims against the state of New York, the New York State Department of
Transportation and the Thruway Authority and Canal Corporation under the
Comprehensive Environmental Response, Compensation and Liability Act. Niagara
Mohawk opposed this motion. On April 3, 1998, the Court denied the New York
State Attorney General's motion as it pertains to the Thruway Authority and
Canal Corporation, and granted the motion relative to the state of New York and
the Department of Transportation. On January 12, 1999, a pre-trial status
conference was convened by the Court. The Court issued a case management order
that called for the close of discovery by the end of June 1999 and established
December 1, 1999 as the trial ready date. The Court has granted a limited
extension of discovery, through September 15, 1999, to complete depositions of
expert witnesses. As a result, Niagara Mohawk cannot predict the outcome of the
pending litigation against the defendants or the allocation of Niagara Mohawk's
share of the costs to remediate the Harbor Point and surrounding sites.
NOTE 3. RATE AND REGULATORY ISSUES AND CONTINGENCIES
Holdings and Niagara Mohawk's financial statements conform to GAAP, including
the accounting principles for rate-regulated entities with respect to its
regulated operations. Niagara Mohawk discontinued application of regulatory
accounting principles to its fossil and hydro generation business as of December
31, 1996. Substantively, SFAS No. 71 permits a public utility, regulated on a
cost-of-service basis, to defer certain costs, which would otherwise be charged
to expense, when authorized to do so by the regulator. These deferred costs are
known as regulatory assets, which in the case of Niagara Mohawk, are
approximately $5.4 billion at June 30, 1999. These regulatory assets are
probable of recovery.
Under POWERCHOICE, a regulatory asset was established for the costs of the MRA
and is being amortized over a period generally not to exceed ten years. Niagara
Mohawk's rates under POWERCHOICE have been designed to permit recovery of the
MRA regulatory asset. Niagara Mohawk is also permitted to defer and amortize
the cost of any additional IPP buyouts. In 1999, there have been three IPP
contracts terminated for a total consideration (cash and/or notes) of $104.2
million. Deferred costs associated with IPP buyouts must generally be amortized
over five years, unless PSC approval is obtained for a different amortization
period. Niagara Mohawk retains the annual net savings during the remaining term
of POWERCHOICE.
Niagara Mohawk, as part of the MRA, entered into restated contracts with eight
IPPs. The contracts have a term of ten years and are structured as indexed swap
contracts where Niagara Mohawk receives or makes payments to the IPP Parties
based upon the differential between the contract price and a market reference
price for electricity. Niagara Mohawk has recorded the liability for these
contractual obligations and recorded a corresponding regulatory asset since
payments under these restated contracts are authorized under POWERCHOICE. The
swap contract regulatory asset includes the fair value of the difference between
the estimated future market prices and the indexed contract prices for the
notional quantities of power in the restated PPA contracts and will be amortized
over ten years ending in June 2008, as notional quantities are settled. The
amount of this regulatory asset will fluctuate as estimates of future market and
contract prices change over the term of the contracts, and will decrease over
the life of the contracts as notional quantities are settled. In the three
months and six months ended June 30, 1999, there have been no changes in the
assumptions and estimates used to value the regulatory asset or liability
associated with these indexed swap contracts.
POWERCHOICE requires Niagara Mohawk to divest its portfolio of fossil and hydro
generating assets. On June 11, 1999, Niagara Mohawk completed the sale of its
two coal-fired generation plants for $355 million. On July 29, 1999, Niagara
Mohawk completed the sale of its hydroelectric generating plants for $425
million. In addition, Niagara Mohawk has entered into an agreement to sell its
Oswego oil and gas-fired plant for $80 million. Niagara Mohawk is pursuing the
sale of its remaining oil and gas-fired plant at Albany and its 25% ownership in
the Roseton Steam Station, which have a combined book value of approximately $76
million as of June 30, 1999. In May 1999, Niagara Mohawk entered into an
agreement with Central Hudson Gas and Electric Corporation ("Central Hudson"),
to sell its interest in the plant to Central Hudson at approximately net book
value by July 1, 2002, if the interest has not been previously sold, subject to
regulatory approval.
The POWERCHOICE agreement provides for deferral and future recovery of net
losses, if any, resulting from the sale of the fossil and hydro generating asset
portfolio. As of June 30, 1999, Niagara Mohawk has recorded a regulatory asset
of $21.7 million for the net loss on the sale of its two coal-fired generating
plants. The net loss is included in Niagara Mohawk's June 30, 1999 balance
sheet as "Deferred Loss on the Sale of Generation Assets." No carrying charges
are being recorded on deferred losses. The amount of the regulatory asset is
subject to change as a result of post closing adjustments on the sales,
transaction costs, the effects of curtailment accounting on pension and other
post employment benefits, the incentive amount awarded in POWERCHOICE, the
accounting treatment relating to the transition power agreements ("TPAs"), and
the outcome of the sale of the remaining fossil assets. After all the sales
transactions have been completed, Niagara Mohawk estimates its net loss
(stranded costs) to be in the range of $90 to $100 million. Niagara Mohawk will
be able to begin recovery of the losses and incentives starting in 2003.
Niagara Mohawk will also incur severance costs as a result of these sales.
Under POWERCHOICE, Niagara Mohawk is allowed to recover up to $10 million in
severance costs and as of June 30, 1999, has incurred approximately $2.0 million
in severance costs. At this time, Niagara Mohawk is unable to determine the
total amount of severance costs it will incur, since there are different options
available to those employees who decide not to transfer with the new owners.
As part of the transaction to sell the Huntley and Dunkirk coal-fired generation
plants, Niagara Mohawk entered into TPAs to purchase energy and capacity from
the buyer, NRG Energy, Inc. ("NRG"). Niagara Mohawk is required to purchase a
portion of the energy generated by the two coal-fired plants; however, it has
call options to purchase additional energy if needed. The aggregate energy and
capacity costs in the TPAs are above forecasted future market prices. The TPAs
convert to financial swaps ("swaps") with the same economic terms as the energy
contracts, with no physical delivery of energy, when the later of two events
occurs: (1) Niagara Mohawk's Senior Notes are rated as investment grade, and
(2) the New York State Independent System Operator ("NYISO") goes into
operation. The first condition regarding Niagara Mohawk's upgraded credit
rating has been met. The second condition, the formation of the NYISO,
is expected to occur by September 1999. The agreements expire in June of 2003.
As of June 30, 1999, Niagara Mohawk has recorded an $82.6 million swap contract
liability for the present value of the difference between the contract energy
prices and projected market prices and has recorded a corresponding swap
contract regulatory asset. The asset and liability will amortize over the
remaining term of the swaps as nominal energy quantities are settled and may be
adjusted as periodic reassessments are made of future energy prices. These
amounts are included with the similar financial swap asset and liability that
arose from the IPP swap agreements as part of the MRA, noted above.
Niagara Mohawk has also signed TPAs associated with the sales of its hydro
generation assets and the Oswego oil and gas fired generation plant. The hydro
TPA calls for the purchase of all energy and capacity through September 2001 at
prices that approximate forecasted future market prices. Niagara Mohawk
anticipates that the energy and capacity to be purchased under the hydro TPA to
be at quantities approximating historical generation levels. The Oswego TPA is
primarily a contract for capacity with a nominal amount of energy at prices
above forecasted future market prices. Since these contracts call for the
actual physical delivery of energy and the claiming of installed capacity, and
do not convert to financial swap agreements, the TPAs will not be added to the
regulatory asset and liability for swap contracts.
On June 24, 1999, Niagara Mohawk announced an agreement to sell its nuclear
assets to AmerGen Energy Company, LLC ("AmerGen"), a joint venture of PECO
Energy Company and British Energy, for approximately $135 million, which is
subject to price adjustments depending on the time of closing. New York State
Electric and Gas Corporation is also a party to the agreement and has agreed to
sell its 18% share of Unit 2 to AmerGen. As a condition of the transaction,
Niagara Mohawk will pre-fund its nuclear decommissioning trust funds at the
closing to a predetermined amount, which amount is contingent upon tax rulings.
The trust funds will be transferred to AmerGen at the closing and AmerGen will
assume full responsibility for the decommissioning of Unit 1 and its ownership
share of Unit 2. Niagara Mohawk estimates that it will be required to make
additional contributions to the decommissioning trust funds in the range of $80
to $120 million. Niagara Mohawk estimates its net loss (stranded costs) to be
in the range of $1,750 to $1,800 million. Niagara Mohawk has petitioned the PSC
for approval to defer this net loss for future recovery, which approval is a
condition of the closing of the sale of the nuclear assets. Accordingly,
Niagara Mohawk would record a regulatory asset for the amount of the actual net
loss upon the closing of the sales. The recording of the regulatory asset is
ultimately conditioned on an assessment by Niagara Mohawk that the amounts are
probable of future recovery in rates and that the rates ultimately approved by
the PSC can be charged to and collected from customers without unanticipated
reduction in demand.
The amount of the net loss is subject to change as a result of closing price
adjustments, transaction costs and the final amount needed to pre-fund the
decommissioning trust funds. The estimated range of loss excludes any
accounting requirements relating to TPAs. Niagara Mohawk has proposed to
recover the regulatory asset, plus a return on the unamortized balance over a
period not to exceed 15 years beginning in 2000, with a significant portion of
the recovery likely to occur in years subsequent to the MRA regulatory asset
amortization. Niagara Mohawk's current rate structure includes recovery and a
return on the nuclear assets. Niagara Mohawk proposes to recover a return on
and a return of stranded nuclear costs within the rate structures contained in
its POWERCHOICE agreement. This sale is also contingent upon approval by, among
others, the PSC, FERC, NRC, IRS, and the SEC. Niagara Mohawk has requested PSC
approval by December 1999. The parties to this sale are seeking to complete the
sale before the next planned refueling and maintenance outage at Unit 2
scheduled in March 2000, but there can be no assurance that such a sale would be
completed by that time. Until the sale is closed, Niagara Mohawk generally
bears the risks associated with the refueling outages at Unit 2 and any
unscheduled outages at both units, including investigations and unexpected
maintenance and capital costs. A sale occurring after the planned outage would
result in purchase price adjustments as specified in the agreement.
Along with the asset purchase agreement, Niagara Mohawk also signed TPAs with
AmerGen to purchase energy and capacity at negotiated prices. The negotiated
prices are expected to be, on average, above projected market prices during the
term of the TPAs. Niagara Mohawk pays only for delivered output from the units.
The terms of the TPAs are for five years from Unit 1 and three years from Unit
2. Upon the expiration of the TPA for Unit 2, Niagara Mohawk and AmerGen also
agreed to a financial sharing agreement whereby Niagara Mohawk will be entitled
to future payments from AmerGen over a ten-year period if electric energy market
prices exceed certain amounts during the ten year sharing period. Niagara
Mohawk has proposed to the PSC that any future payments received under the
financial sharing agreement will serve to reduce the unamortized regulatory
asset recorded as a result of the sale of the nuclear assets.
Upon closing of the sale of the nuclear assets, Niagara Mohawk will still be
liable for spent nuclear fuel disposal for its share of fuel burned prior to the
closing. See Niagara Mohawk's Form 10-K for fiscal year ended December 31,
1998, Part II, Item 8. Financial Statements and Supplementary Data, Note 3.
Nuclear Operations, "Nuclear Fuel Disposal Cost" for a discussion of the Nuclear
Waste Policy Act of 1982 and Niagara Mohawk's determination of liability. The
Nuclear Waste Act provided three payment options for liquidating the liability
for the disposal of nuclear fuel irradiated prior to 1983, and Niagara Mohawk
elected to delay payment, with interest, until the year in which it initially
plans to ship irradiated fuel to an approved DOE disposal facility. Through
June 30, 1999, Niagara Mohawk has recorded a liability of approximately $123
million. This liability will remain with Niagara Mohawk until the DOE provides
disposal facilities. Niagara Mohawk also retains liability for changes, if any,
in the disposal fees already paid to the DOE for fuel burned from 1983 through
closing of the sale. Niagara Mohawk is unable to predict the outcome of this
matter.
While the TPAs for the generation facilities are above market, they are
designed to help Niagara Mohawk meet the objectives of rate reduction and price
cap commitments as well as meet expected demand as the "provider of last
resort" as outlined in the POWERCHOICE agreement. The TPAs act as hedges
against rising power costs. The terms of the TPAs provide for both fixed and
variable payments, encompassing both capacity and energy. The TPAs are one
part of the integrated transactions for the sale of the generating facilities.
The Emerging Issues Task Force ("EITF") of the FASB reached a consensus on Issue
No. 97-4 "Deregulation of the Pricing of Electricity - Issues Related to the
Application of SFAS No. 71 and SFAS No. 101" in July 1997. EITF 97-4 does not
require a company to earn a return on regulatory assets that arise from a
deregulating transition plan in assessing the applicability of SFAS No. 71.
Niagara Mohawk believes that the regulated cash flows to be derived from prices
it will charge for electric service over the next ten years, including the
Competitive Transition Charge ("CTC"), assuming no unforeseen reduction in
demand or bypass of the CTC or exit fees, will be sufficient to recover the MRA
regulatory asset and to provide recovery of and a return on the remainder of its
assets, as appropriate. In the event Niagara Mohawk determines, as a result of
lower than expected revenues and/or higher than expected costs, that its net
regulatory assets are not probable of recovery, it can no longer apply the
principles of SFAS No. 71 and would be required to record an after-tax non-cash
charge against income for any remaining unamortized regulatory assets and
liabilities. If Niagara Mohawk could no longer apply SFAS No. 71, the resulting
charge would be material to Holdings and Niagara Mohawk's reported financial
condition and results of operations and adversely effect Niagara Mohawk's, and
therefore, Holdings' ability to pay dividends.
Under POWERCHOICE, Niagara Mohawk's remaining electric business (electric
transmission and distribution business) will continue to be rate-regulated on a
cost-of-service basis and, accordingly, Niagara Mohawk continues to apply SFAS
No. 71 to these businesses. Also, Niagara Mohawk's IPP contracts, including
those restructured under the MRA, as well as the TPAs entered into in connection
with the generation divestiture, will continue to be the obligations of the
regulated business.
NOTE 4. SEGMENT INFORMATION
Holdings is organized between regulated and unregulated activities. Within the
regulated business, Niagara Mohawk, which has 99% of total assets and 97% of
total revenues, there are three principal business units: Energy Delivery,
Nuclear and Fossil/Hydro. As discussed above, Niagara Mohawk is in the process
of selling its fossil, hydro and nuclear assets. Although there are three
identified business units, financial performance and resource allocation are
measured and managed at the regulated business level.
Holdings' unregulated activities do not meet the reporting thresholds of SFAS
No. 131, but comprise a substantial portion of "other" in the accompanying
table.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- --------------------------
Total Economic Total Economic
(In thousands of dollars) Revenues Value Added Revenues Value Added
- ------------------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
1999
REGULATED . . . . . . . . $ 870,461 $ (210,702) $1,966,482 $ (341,507)
OTHER . . . . . . . . . . 44,117 (5,846) 67,502 (13,724)
ELIMINATIONS. . . . . . . (257) - (529) -
------------- ------------- ----------- -------------
TOTAL CONSOLIDATED. $ 914,321 $ (216,548) $2,033,455 $ (355,231)
========================= ============= ============= =========== =============
1998
Regulated . . . . . . . . $ 910,906 $ (176,267) $2,009,310 $ (317,159)
Other . . . . . . . . . . 34,470 (11,618) 100,639 (21,195)
Eliminations. . . . . . . (692) - (1,368) -
------------- ------------- ----------- -------------
Total Consolidated. $ 944,684 $ (187,885) $2,108,581 $ (338,354)
========================= ============= ============= =========== =============
</TABLE>
Holdings and Niagara Mohawk use a shareholder value based management system.
The measure of shareholder value creation is Economic Value Added ("EVA"). EVA
is the financial measure used to evaluate projects, allocate resources and
report and provide performance incentives.
EVA is calculated as Net Operating Profit after Taxes less a charge for the use
of capital employed. The capital charge is determined by applying a rate
representing an estimate of investors' expected return given the risk of the
business and a targeted capital structure. The rate is not the same as the
embedded cost of capital, and in particular, does not reflect the return on
equity that may be established in a rate proceeding. Certain adjustments to
accounting data are made to more closely reflect operating or economic results.
For the three months and six months ending June 30, 1999 and 1998, an adjustment
is made to include the recognition of the liability for remaining future
over-market contracts with IPPs and the corresponding recognition of imputed
interest on that liability. In addition, there was a significant adjustment for
the six months ending June 30, 1998 to reflect the re-capitalization for EVA
purposes of the incremental operating expense associated with the January 1998
ice storm.
EVA is further segmented between EVA from Operations and EVA related to the
IPPs. This distinction is used to allow management to focus on operating
performance separate from the consequences of the IPP contracts, the MRA
regulatory asset and finance decisions related to managing the capitalization of
Holdings.
A reconciliation of total segment EVA to total consolidated net income for the
three months and six months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(in thousands of dollars) 1999 1998 1999 1998
- ------------------------------------- -------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Economic Value Added:
Operations. . . . . . . . . . . . $ (90,965) $ (83,369) $(102,186) $(129,608)
IPP - Related . . . . . . . . . . (125,583) (104,516) (253,045) (208,746)
-------------- ------------- ---------- ---------
Total Economic Value Added. . . . . . (216,548) (187,885) (355,231) (338,354)
Charge for Use of Investor's Capital. 300,576 310,235 599,990 619,155
Adjustments for Significant Items . . (14,634) (218,582) (29,268) (311,722)
Interest Charges (net of taxes) . . . (85,667) (45,176) (171,908) (90,124)
Extraordinary Item. . . . . . . . . . (10,750) - (10,750) -
Niagara Mohawk Preferred Dividends. . (9,024) (9,171) (18,048) (18,394)
-------------- ------------- ---------- ----------
Consolidated Net Income. . . . . . $ (36,047) $ (150,579) $ 14,785 $(139,439)
============== ============= ========== ==========
</TABLE>
NOTE 5. EXTRAORDINARY ITEM
During the second quarter of 1999, Holdings and Niagara Mohawk recognized an
extraordinary after-tax charge of $10.8 million or 6 cents per share as a result
of the early redemption of $151.7 million of First Mortgage Bonds with varying
interest rates and maturities. The bonds were redeemed at an average of 111.3%
of the principal amount, with accrued interest to the date of redemption.
In July 1999, Niagara Mohawk incurred $7.6 million after-tax, or 4 cents per
share in connection with the early redemption of $150 million of First Mortgage
Bonds. The cost of the premium and unamortized debt issue costs will be
accounted for as an extraordinary item in the third quarter of 1999.
On August 5, 1999, Niagara Mohawk made a notification to redeem $500 million
of its Senior Notes. The call will be exercised on September 8, 1999. Niagara
Mohawk will redeem the notes at a cash redemption price equal to 100% of the
principal plus accrued interest. Niagara Mohawk expects to recognize, as
an extraordinary item, approximately $5.5 million, after tax or 3 cents per
share, related to unamortized debt issue costs associated with the notes.
<PAGE>
REVIEW BY INDEPENDENT ACCOUNTANTS
Holdings and Niagara Mohawk's independent accountants, PricewaterhouseCoopers
LLP, have made limited reviews (based on procedures adopted by the American
Institute of Certified Public Accountants) of the unaudited Consolidated Balance
Sheets of Niagara Mohawk Holdings, Inc. and its subsidiary companies, as of June
30, 1999 and 1998, and the related unaudited Consolidated Statements of Income
for the three-month and six-month periods ended June 30, 1999 and 1998 and of
Cash Flows for the six-month period ended June 30, 1999 and 1998 and the
unaudited Consolidated Balance Sheets of Niagara Mohawk Power Corporation and
its subsidiary companies as of June 30, 1999 and 1998 and the related unaudited
Consolidated Statements of Income for the three-month and six-month periods
ended June 30, 1999 and 1998 and of Cash Flows for the six-month period ended
June 30, 1999 and 1998. The accountants' report regarding their limited reviews
of the Form 10-Q of Niagara Mohawk Holdings and its subsidiaries, and Niagara
Mohawk Power Corporation and its subsidiaries appears on the next page. That
report does not express an opinion on the interim unaudited consolidated
financial information. PricewaterhouseCoopers LLP has not carried out any
significant or additional audit tests beyond those which would have been
necessary if their report had not been included. Accordingly, such report is
not a "report" or "part of the Registration Statement" within the meaning of
Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of
Section 11 of such Act do not apply.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Niagara Mohawk Holdings, Inc. and
Niagara Mohawk Power Corporation
300 Erie Boulevard West
Syracuse, NY 13202
We have reviewed the condensed consolidated balance sheets of Niagara Mohawk
Holdings, Inc. and its subsidiaries as of June 30, 1999 and 1998 (not presented
herein), and the related condensed consolidated statements of income for the
three-month and six-month periods ended June 30, 1999 and 1998 and cash flows
for the six-month period ended June 30, 1999 and 1998, and the condensed
consolidated balance sheets of Niagara Mohawk Power Corporation and its
subsidiaries as of June 30, 1999 and 1998 (not presented herein), and the
related condensed consolidated statements of income for the three-month and
six-month periods ended June 30, 1999 and 1998 and of cash flows for the
six-month period ended June 30, 1999 and 1998. These financial statements are
the responsibility of Niagara Mohawk Holdings, Inc.'s management and Niagara
Mohawk Power Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet of Niagara Mohawk Power Corporation as of
December 31, 1998, and the related consolidated statements of income, and
retained earnings, of cash flows and of comprehensive income for the year then
ended (not presented herein), and in our report dated January 28, 1999, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1998, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
PRICEWATERHOUSECOOPERS LLP
Syracuse, NY
August 13, 1999
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements included in this Quarterly Report on Form 10-Q are
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934 that involve risk and uncertainty, including the improvement in
Holdings and Niagara Mohawk's cash flow upon the implementation of the MRA and
POWERCHOICE, the timing and outcome of the future sale of Niagara Mohawk's
remaining fossil and nuclear generation assets, the planned repayment of debt,
and the outcome of the Niagara Mohawk's transition to a new customer service
system. In addition, certain statements made related to the year 2000 readiness
program are also forward-looking (see "Year 2000 Readiness Disclosure"). These
forward-looking statements are based upon a number of assumptions, including
assumptions regarding the POWERCHOICE agreement and regulatory actions to
continue to support such an agreement. Actual future results and developments
may differ materially depending on a number of factors, including regulatory
changes either by the federal government or the PSC, uncertainties regarding the
ultimate impact on Holdings and Niagara Mohawk as the regulated electric and gas
industries are further deregulated and electricity and gas suppliers gain open
access to Niagara Mohawk's retail customers, challenges to the POWERCHOICE
agreement under New York laws, the timing and extent of changes in commodity
prices and interest rates, the effects of weather, the length and frequency of
outages at Niagara Mohawk's two nuclear plants, the results from Niagara
Mohawk's ongoing sale of its generation assets, length of the transition period
to Niagara Mohawk's new customer service system and the economic conditions of
Niagara Mohawk's service territory.
POWERCHOICE AGREEMENT
(See Niagara Mohawk's Form 10-K for fiscal year ended December 31, 1998, Part
II, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - "Master Restructuring Agreement and the POWERCHOICE
Agreement").
Niagara Mohawk's POWERCHOICE Agreement was approved by the PSC in a written
order issued March 20, 1998. Niagara Mohawk consummated its MRA Agreement with
certain IPP Parties on June 30, 1998 and implemented the rate reductions under
POWERCHOICE effective September 1, 1998 upon PSC approval of the rate tariff
schedules.
The POWERCHOICE agreement establishes a five-year rate plan that will reduce
class average residential and commercial prices by an aggregate of 3.2% over the
first three years, beginning September 1, 1998. The reduction in prices
includes certain savings that will result from approved reductions of the GRT.
Industrial customers will see average reductions of 25% relative to 1995
tariffs; these decreases will include discounts currently offered to some
industrial customers through optional and flexible rate programs.
Effective August 1, 1999, all of the Company's customers are able to choose
their electricity supplier. The Company will continue to distribute electricity
through its transmission and distribution systems and will be obligated to be
the provider of last resort for those customers who do not exercise their right
to choose a new electricity supplier. However, Niagara Mohawk believes that the
PSC will be instituting a generic proceeding to explore end-state issues,
including the issue of provider of last resort, based on comments made by the
PSC at its May 1999 session. Niagara Mohawk is unable to predict the outcome or
timing of such a proceeding.
In early October 1998, the Alliance for Municipal Power ("AMP"), a group of 21
towns and villages in St. Lawrence and Franklin Counties pursuing
municipalization, and Alfred P. Coppola ("Coppola"), a Councilman from the City
of Buffalo, commenced an Article 78 Proceeding in Albany County Supreme Court
that challenged the PSC's decision to approve POWERCHOICE and the PSC's decision
that denied the petitions of Alliance for Municipal Power and Coppola for
rehearing before the Commission. The Article 78 Petition sought to vacate the
decision of the PSC approving POWERCHOICE provisions relating to the
determination and recovery of strandable costs through the application of a
competitive transition charge and exit fees. The PSC has made a motion to
dismiss the Article 78 Petition in this matter. On March 11, 1999, the Albany
County Supreme Court dismissed in its entirety, the petition of Coppola and also
dismissed AMP's petition to the extent that it challenged the determination and
recovery of stranded costs through the application of CTCs and exit fees.
However, the Court did order the PSC to respond to AMP's claim that the PSC
failed to act on discovery requests seeking information about exit fees.
Niagara Mohawk has provided AMP with an updated exit fee estimate of $150 to
$272 million. The range is dependent on whether the formula prescribed by the
PSC in POWERCHOICE or the method defined by FERC is used. During the first
quarter of 1999, AMP filed a motion to re-argue with the Supreme Court and has
also filed a notice of appeal from the decision of the lower court. On June 29,
1999, the Albany County Supreme Court denied AMP's motion to re-argue and renew
the case. Niagara Mohawk is unable to predict the outcome of this matter.
Suspension of POWERCHOICE or renegotiation of its material terms could have a
material adverse effect on Holdings and Niagara Mohawk's results of operations,
financial condition, and future cash flows. For a further discussion of Niagara
Mohawk's stranded cost recovery in the case of municipalization, see Niagara
Mohawk's Form 10-K for fiscal year ended December 31, 1998, Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - "FERC Rulemaking on Open Access and Stranded Cost Recovery").
GENERATION ASSET SALES
In its written Order dated May 6, 1998, the PSC approved Niagara Mohawk's plan
to divest all of its fossil and hydro generation assets, which is a key
component in its POWERCHOICE agreement to lower average electricity prices and
provide customer choice. On June 11, 1999, Niagara Mohawk completed the sale of
its two coal-fired generation plants to NRG Energy, Inc. for $355 million.
Subsequently, on July 29, 1999, Niagara Mohawk completed the sale of its
hydroelectric generation assets with Orion Power Holding, Inc. for $425 million.
Niagara Mohawk has also previously announced an agreement to sell its oil and
gas fired generating plant in Oswego for $80 million. See Niagara Mohawk's Form
10-K for fiscal year ended December 31, 1998, Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
"Master Restructuring Agreement and the POWERCHOICE Agreement" and Holdings and
Niagara Mohawk's Form 10-Q for the quarter ended March 31, 1999, Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - "POWERCHOICE Agreement" for discussion of such agreements and
associated transition power agreements. Niagara Mohawk continues to pursue the
sale of its oil and gas-fired plant in Albany, which has a net book value of
approximately $36 million. Niagara Mohawk is unable to predict the outcome or
timing of the divestiture of its Albany plant. In May 1999, Niagara Mohawk
entered into an agreement with Central Hudson to sell its interest in the
Roseton plant to Central Hudson at approximately net book value by July 1, 2002,
if the interest has not been previously sold, subject to regulatory approval.
At June 30, 1999, the net book value of Niagara Mohawk's interest in the Roseton
plant was approximately $40 million.
The sale of the fossil and hydro assets will serve to quantify any stranded
costs associated with Niagara Mohawk's fossil and hydro generating assets.
Niagara Mohawk will have a reasonable opportunity to recover these costs through
the CTC and otherwise as described above. The POWERCHOICE agreement provides
for deferral and future recovery of net losses, if any, resulting from the sale
of the assets. As of June 30, 1999, Niagara Mohawk has recorded a regulatory
asset of $21.7 million for the net loss on the sale of its two coal-fired
generating plants. The net loss is included in Niagara Mohawk's June 30, 1999
balance sheet as "Deferred Loss on the Sale of Generation Assets." No carrying
charges are being recorded on deferred losses. The amount of the regulatory
asset is subject to change as a result of post closing adjustments on the sales,
transaction costs, the effects of curtailment accounting on pension and other
post employment benefits, the incentive amount awarded in POWERCHOICE, the
accounting treatment relating to the TPAs, and the outcome and closing of the
sale of the remaining fossil and hydro assets. After all the sales transactions
have been completed, Niagara Mohawk estimates its net loss (stranded costs) to
be in the range of $90 to $100 million. Niagara Mohawk will be able to begin
recovery of the losses and incentives starting in 2003.
Niagara Mohawk will also incur severance costs as a result of these sales.
Under POWERCHOICE, Niagara Mohawk is allowed to recover up to $10 million in
severance costs and as of June 30, 1999, has incurred approximately $2.0 million
in severance costs. At this time, Niagara Mohawk is unable to determine the
total amount of severance costs it will incur, since there are different options
available to those employees who decide not to transfer with the new owners.
After the sales are complete, Niagara Mohawk has agreed not to own any
non-nuclear generating assets in the state of New York, subject to certain
exceptions provided in the POWERCHOICE agreement. Under the terms of the note
indenture prepared in connection with the financing of the MRA, Niagara Mohawk
is obligated to use 85% of the proceeds of the sale of its generation assets to
reduce outstanding debt. Proceeds on the announced fossil and hydro sales are
expected to aggregate $860 million. For a discussion on how Niagara Mohawk used
the proceeds from the sale of its two coal-fired generation plants, see
"Liquidity and Capital Resources."
The POWERCHOICE agreement contemplated that Niagara Mohawk's nuclear plants
would remain part of its regulated business. The POWERCHOICE agreement
stipulated that absent a statewide solution, Niagara Mohawk would file a
detailed plan for analyzing other proposals regarding its nuclear assets,
including the feasibility of an auction, transfer and/or divestiture of such
facilities, within 24 months of POWERCHOICE. On June 24, 1999, Niagara Mohawk
announced the sale of its nuclear assets to AmerGen Energy Company, LLC
("AmerGen") for approximately $135 million, which price adjusts depending
on the time of closing. New York State Electric and Gas Corporation is also
a party to the agreement and has agreed to sell its 18% share of Unit 2 to
AmerGen. As a condition of the transaction, Niagara Mohawk will pre-fund its
nuclear decommissioning trust funds at the closing to a predetermined amount,
which amount is contingent upon tax rulings. The trust funds will be
transferred to AmerGen at the closing, and AmerGen will assume full
responsibility for the decommissioning of Unit 1 and its ownership share of Unit
2. Niagara Mohawk estimates that it will be required to make additional
contributions to the decommissioning trust funds in the range of $80 to $120
million. Niagara Mohawk estimates its net loss (stranded costs) to be in the
range of $1,750 to $1,800 million. Niagara Mohawk has petitioned the PSC for
approval to defer this net loss for future recovery, which approval is a
condition of closing the sale of the nuclear assets. Accordingly, Niagara
Mohawk would record a regulatory asset for the amount of the actual net loss
upon the closing of the sales. The recording of the regulatory asset is
ultimately conditioned on an assessment by Niagara Mohawk that the amounts are
probable of future recovery in rates and that the rates ultimately approved by
the PSC can be charged to and collected from customers without unanticipated
reduction in demand.
The amount of the net loss is subject to change as a result of closing price
adjustments, transaction costs and the final amount needed to pre-fund the
decommissioning trust funds. The estimated range of loss excludes any
accounting requirements relating to TPAs. Niagara Mohawk has proposed to
recover the regulatory asset plus a return on the unamortized balance over a
period not to exceed 15 years, beginning in 2000, with a significant portion of
the recovery likely to occur in years subsequent to the MRA regulatory asset
amortization. Niagara Mohawk's current rate structure includes recovery and a
return on nuclear assets. Niagara Mohawk proposes to recover a return on and a
return of stranded nuclear costs within the rate structures contained in its
POWERCHOICE agreement. The sale is also contingent upon approval by, among
others, the PSC, FERC, NRC, IRS, and SEC. Niagara Mohawk has requested PSC
approval by December 1999. The parties to this sale are seeking to complete the
sale before the next planned refueling and maintenance outage at Unit 2
scheduled in March 2000, but there can be no assurance that such a sale would be
completed by that time. Until the sale is closed, Niagara Mohawk generally
bears the risks associated with the refueling outage for Unit 2 and any
unscheduled outages at both units, including investigations and unexpected
maintenance and capital costs. A sale occurring after the planned outage would
result in purchase price adjustments as specified in the agreement.
Along with the asset purchase agreement, Niagara Mohawk also signed TPAs with
AmerGen for energy and capacity at negotiated prices, which are above market
based on current energy price forecasts. The terms of the TPAs are for five
years from Unit 1 and three years from Unit 2. Upon the expiration of the TPA
for Unit 2, Niagara Mohawk and AmerGen also agreed to a financial sharing
agreement whereby Niagara Mohawk will be entitled to payments from AmerGen over
a ten year period if electric energy market prices exceed certain amounts during
the ten year sharing period. Niagara Mohawk has proposed to the PSC that any
future payments received under the financial sharing agreement will serve to
reduce the unamortized regulatory asset recorded as a result of the sale of the
nuclear assets.
While the TPAs for the generation facilities are above market, they are
designed to help Niagara Mohawk meet the objectives of rate reduction and price
cap commitments as well as meet expected demand as the "provider of last
resort" as outlined in the POWERCHOICE agreement. The TPAs act as hedges
against rising power costs. The terms of the TPAs provide for both fixed and
variable payments, encompassing both capacity and energy. The TPAs are one
part of the integrated transactions for the sale of the generating facilities.
Upon closing of the sale of the nuclear assets, Niagara Mohawk will still be
liable for spent nuclear fuel disposal for its share of fuel burned prior to the
closing. See Niagara Mohawk's Form 10-K for fiscal year ended December 31,
1998, Part II, Item 8. Financial Statements and Supplementary Data, Note 3.
Nuclear Operations, "Nuclear Fuel Disposal Cost" for a discussion of the Nuclear
Waste Policy Act of 1982 and Niagara Mohawk's determination of liability. The
Nuclear Waste Act provided three payment options for liquidating the liability
for the disposal of nuclear fuel irradiated prior to 1983, and Niagara Mohawk
elected to delay payment, with interest, until the year in which it initially
plans to ship irradiated fuel to an approved DOE disposal facility. Through
June 30, 1999, Niagara Mohawk has recorded a liability of approximately $123
million. This liability will remain with Niagara Mohawk until the DOE provides
disposal facilities. Niagara Mohawk also retains liability for changes, if any,
in the disposal fees already paid to the DOE for fuel burned from 1983 through
closing of the sale. Niagara Mohawk is unable to predict the outcome of this
matter.
FERC RULEMAKING ON OPEN ACCESS
(See Niagara Mohawk's Form 10-K for fiscal year ended December 31, 1998, Part
II, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - "FERC Rulemaking on Open Access and Stranded Cost
Recovery").
In April 1996, the FERC issued Order 888. Order 888 promotes competition by
requiring that public utilities owning, operating, or controlling interstate
transmission facilities file tariffs which offer others the same transmission
services they provide for themselves, under comparable terms and conditions. In
addition, FERC Order 888, required the NYPP to file reformed power pooling
agreements that establish open, non-discriminatory membership provisions and
modify any provisions that are unduly discriminatory or preferential. On
January 31, 1997, the NYPP Member Systems (the "Member Systems") submitted a
comprehensive proposal to establish a NYISO, a New York State Reliability
Council ("NYSRC") and a New York Power Exchange ("NYPE") that will foster a
fully competitive wholesale electricity market in New York State. The NYPE
proposal was subsequently withdrawn as one or more privately developed power
exchanges expressed intentions to serve the New York market.
On June 24, 1998, FERC gave the Member Systems conditional approval to form the
NYISO and since that time several filings and settlements have been made. On
January 27, 1999, FERC conditionally approved the NYISO tariff subject to
certain modifications and on April 30, 1999, the Member Systems made a
Compliance Filing to address the modifications FERC required to be made to the
NYISO tariff. On July 2, 1999, the Member Systems filed a multi-party
settlement agreement, which addressed FERC's remaining concerns relative to
NYISO governance. In addition, market trials began in January 1999 and continue
to progress in preparation for the NYISO start up.
On July 28, 1999, FERC accepted the NYISO's revised tariff and market rules,
finding that the tariffs and agreements covering such issues as reliability
policies, firm and network transmission service, and transmission congestion
management and charges are acceptable with some modifications. The Member
Systems are proceeding to address these remaining matters.
While Niagara Mohawk is unable to predict when FERC will rule on the Member
Systems' filings on NYISO governance revisions and various other remaining
matters, it does believe that it is probable that the NYISO will commence
operation in the fall of 1999. Niagara Mohawk views these developments as
important progress toward a more competitive market for electricity in New York
State, consistent with the POWERCHOICE restructuring agreement.
NUCLEAR MATTERS
UNIT 1: Some owners of older General Electric Company boiling water reactors,
including Niagara Mohawk, have experienced cracking in horizontal welds in the
plants' core shrouds. In response to industry findings, Niagara Mohawk
installed preemptive modifications to the Unit 1 core shroud during a 1995
refueling and maintenance outage. The core shroud, a stainless steel cylinder
inside the reactor vessel, surrounds the fuel and directs the flow of reactor
water through the fuel assemblies. Inspections conducted as part of the March
1997 refueling and maintenance outage detected cracking in vertical welds not
reinforced by the 1995 repairs. Subsequently, Niagara Mohawk filed a
comprehensive inspection and analysis report with the NRC that concluded that
the condition of the Unit 1 core shroud supported the safe operation of the
plant, and obtained NRC approval to operate Unit 1 until the Unit's next
scheduled refueling and maintenance outage in 1999, at which time the core
shroud would be reinspected. Niagara Mohawk developed a repair plan that would
be accomplished during the outage if inspections indicated that repairs were
needed. The refueling and maintenance outage at Unit 1 began on April 11, 1999.
During the core shroud reinspection, indications of crack growth within growth
rate analyzed limits, were identified around a portion of one of the welds.
After careful examination and analysis, Niagara Mohawk decided to install a
repair modification on two of the shroud's vertical welds. A damaged tie rod,
previously installed to address horizontal shroud cracks was also identified.
As a result, all four tie rods were repaired to correct a design deficiency.
The plant returned to service on June 16, 1999. The incremental costs
associated with the refueling and maintenance outage at Unit 1 was $10.8
million, which includes $6.3 million of replacement power costs.
UNIT 2: On June 24, 1999, Unit 2 automatically shut down due to a malfunction
in a device that controls water flow level through the reactor vessel. Unit 2
returned to full power on July 26, 1999. The incremental costs associated with
outage at Unit 2 was $12.5 million, which includes $10.6 million of replacement
power costs.
YEAR 2000 READINESS DISCLOSURE
As the year 2000 approaches, Niagara Mohawk, along with other companies, could
experience potentially serious operational problems, since many computer
programs that were developed in the past may not properly recognize calendar
dates beginning with year 2000. Further, there are embedded chips contained
within generation, transmission, distribution, gas, and other equipment that may
be date sensitive. In circumstances where an embedded chip fails to recognize
the correct date, electric, gas and business operations could be adversely
affected.
PLAN: Niagara Mohawk formed a year 2000 project management office and year 2000
project managers were appointed within each business group. A year 2000 program
vice-president and an executive level steering committee were put in place to
oversee all aspects of the program. In addition to Niagara Mohawk personnel,
Niagara Mohawk has retained the services of leading computer service and
consulting firms specializing in computer systems and embedded components, which
are involved in various phases of the project. Also, Niagara Mohawk is working
closely with industry groups such as the Electric Power Research Institute
("EPRI"), North American Electric Reliability Council ("NERC"), Nuclear Energy
Institute, Nuclear Utilities Software Management Group, and other utilities. In
addition, the PSC required that New York utilities have mission critical year
2000 work, including a contingency plan, completed by July 1, 1999, and the NRC
required Niagara Mohawk to certify that its two nuclear plants will be year 2000
ready by July 1, 1999. A plan was developed that established phases of the work
to be done. The phases are:
- - an inventory of all systems and equipment, (including a physical walkdown
of all of the Company's substations),
- - an assessment of all systems and equipment and definition of next steps,
- - remediation,
- - testing and validation,
- - acceptance and deployment,
- - independent validation, and
- - contingency planning.
As part of the assessment phase, all the systems and equipment were prioritized
into four categories based upon their functional need and importance. The
priorities are:
- - Priority 1 - Any failure or regulatory breach that can cause an
interruption to the generation or delivery of electric or gas energy to
customers, or can jeopardize the safety of any employee, customer, or the
general public (e.g. the Energy Management System that controls the flow of
electricity and communicates information between the control center and
substations).
- - Priority 2 - Any failure that can cause an interruption to customer
service or breach of significant regulatory contractual or financial
commitment (e.g. meter reading equipment).
- - Priority 3 - Any failure that can inconvenience a business partner or
significantly impact a Niagara Mohawk business group productivity (e.g.
electronic payments to vendors).
- - Priority 4 - Any failure that can adversely impact a Niagara Mohawk work
group or personal productivity or other business processes (e.g.
applications used on a desktop computer used to accomplish day-to-day
productivity activities).
Although Niagara Mohawk has identified seven different phases of the project,
in some cases the phases are done concurrently. For example, individual
computers may be completely tested and redeployed while others are still being
remediated. Information obtained within the phases is reviewed by a subject
matter expert panel consisting of employees and consultants. Additional testing
may be performed based on the importance of the component and a recommendation
of the panel. Complete integration and interface testing will be performed on
components and systems whenever possible.
Niagara Mohawk's primary focus has been on priorities 1 and 2 because of the
direct impact on customers. Although Niagara Mohawk's plan addressed completion
of all priority items prior to July 1, 1999, there are a few minor exceptions.
These are scheduled to be completed prior to January 1, 2000.
Niagara Mohawk's progress with its year 2000 issues for mission critical items
are as follows:
PHASE STATUS ESTIMATED COMPLETION DATE
- ---------------------- --------------- -------------------------
- - Inventory Complete
- - Assessment Complete
- - Remediation Complete
- - Testing Complete
- - Acceptance Complete
- - Validation In-progress October 1999
- - Contingency Planning Ongoing
Niagara Mohawk has completed the majority of its year 2000 readiness project
and has also met the readiness goals established by the PSC and NRC. The
validation phase has been completed except for a final Quality Assurance Audit
scheduled for September 1999. The contingency planning phase is also complete
with respect to developing contingency plans. However, Niagara Mohawk will use
the time remaining in 1999 to review the work already completed and to test its
contingency plans through further testing, training and employee drills.
Niagara Mohawk has also successfully completed year 2000 readiness tests at its
generation plants. Although the Huntley, Dunkirk and hydro generation plants
have been sold and the Oswego generation plant will be sold by year end, it was
important for Niagara Mohawk to complete its year 2000 testing of these plants
since Niagara Mohawk will continue to receive power from these plants under
transition power contracts subsequent to their sale and transfer. Niagara
Mohawk will continue to complete any outstanding tests and plans at its
remaining generation facilities.
RISKS: Like any organization, Niagara Mohawk is dependent upon many third
parties, including suppliers of energy and materials (e.g. independent power
producers), service providers, transporters, and the government. These third
parties provide services vital to Niagara Mohawk and year 2000 problems at these
companies could adversely affect electric and gas operations. One such example
is that Niagara Mohawk expects that by the year 2000, it will be purchasing the
majority of its electric generation needs. If any of these suppliers has a year
2000 failure, it could interrupt energy supply to Niagara Mohawk's customers.
Another example of such a vital third party is telephone companies. If the
telephone companies have year 2000 failures, this could in turn affect Niagara
Mohawk's customer response capabilities and its ability to operate and maintain
the transmission and distribution system that carries electricity to businesses
and customer homes. To address these third party issues, Niagara Mohawk has
requested certificates of compliance from third parties and has followed up with
the third parties as appropriate. Niagara Mohawk intends to continue following
up with significant third parties during the remainder of 1999 to verify the
accuracy of responses and the status of their year 2000 readiness. However,
Niagara Mohawk may not be able to verify accuracy in all cases. With respect to
generation suppliers, Niagara Mohawk has had a higher level of contact and
believes there will be an adequate amount of supply available. The inability of
suppliers to complete their year 2000 readiness process could materially
adversely impact Niagara Mohawk.
Niagara Mohawk is connected to an electric grid that links utilities throughout
the United States and Canada. This interconnection is essential to the
reliability and operational integrity of the connected utilities. If one of the
electric utilities in the grid has a failure, it could cause power fluctuations
and possible interruption of others in the grid. As a result, even if Niagara
Mohawk did an effective job of becoming compliant, it could still have customer
interruptions. Niagara Mohawk is working closely with NYPP, NERC, other
utilities, EPRI, and other industry groups to address the issue of grid
reliability.
Niagara Mohawk's gas distribution system also has the potential to be adversely
impacted by year 2000 noncompliance either by third parties or if its program
fails to identify and remediate all problem areas. From the third party natural
gas production and transmission facilities, to Niagara Mohawk's distribution
pipeline system, and ultimately, to the customer, there are computer systems and
equipment with date sensitive processing. If, despite Niagara Mohawk's and
third partys' best efforts, a year 2000 failure occurs, the flow of gas to the
customer could be jeopardized.
As an example, Niagara Mohawk is connected directly to three major transmission
pipelines, and has an indirect connection with a fourth. If these pipelines are
unable to provide full gas delivery, Niagara Mohawk would implement standing
emergency procedures that could interrupt customers. To avoid such an event,
Niagara Mohawk is working with the pipelines and state agencies to reduce the
probability of any customer interruptions due to year 2000 problems.
The failure to correct for year 2000 problems, either by Niagara Mohawk or third
parties, could result in significant disruptions of Niagara Mohawk operations.
While massive disruptions due to year 2000 failures are believed to be unlikely
by both the electric and gas industries and by Niagara Mohawk, they cannot be
ruled out. Localized disruptions, similar to storm damage related disruptions
caused by unforeseen failures, either within Niagara Mohawk or by a critical
third party, such as voice or data links, are believed to be the most reasonably
likely worst case scenario for Niagara Mohawk based upon current knowledge
regarding its condition of readiness and the state of readiness of third
parties. Niagara Mohawk's business systems may also be affected by a year 2000
related failure that could temporarily interrupt the ability to communicate with
customers, collect revenue, or complete cash transactions. In addition, no
assurances can be given that the systems of vendors, interconnected utilities,
power producers and customers will not result in year 2000 problems. Since the
expected impact of these scenarios on Niagara Mohawk's operations, cash flow and
financial position cannot be determined, there is no assurance that they would
not be material. However, Niagara Mohawk's contingency plans are designed to
address these potential failures and mitigate their long-term effect.
CONTINGENCY PLANS: Niagara Mohawk's year 2000 schedules also include the
development and implementation of contingency plans in the event of year 2000
failures, both within Niagara Mohawk and by third parties. Niagara Mohawk's
Emergency Planning manager is responsible for overseeing and assisting the
business groups in the creation of their contingency plans. The contingency
plans vary by business group and by the various priority levels for different
systems and equipment. A schedule was created to track progress of these plans.
Niagara Mohawk's contingency plans have been developed to deal with problems
such as the loss of telecommunications or the shut down of a power plant. The
plans provide for more than 400 separate contingencies. Niagara Mohawk's
contingency plans include staffing of critical substations and availability of
backup communication systems believed to be immune from year 2000 impact.
Additional staffing will be provided as needed at other Niagara Mohawk owned
generation, transmission, and distribution control points for both gas and
electric infrastructure. Other contingency plans and drills include the start
up of a generation plant assuming loss of power at the plant.
On April 9, 1999, Niagara Mohawk, along with approximately 200 other electric
utilities across the United States, participated in a drill coordinated by NERC.
NERC has reported that overall, the drill was a successful exercise of backup
voice system and manual procedures needed to operate the electric power grids
of the United States and Canada in the unlikely event of a loss of
communications due to year 2000 failures. Niagara Mohawk will participate in
NERC's next drill scheduled for September 8 and 9, 1999.
COSTS: Niagara Mohawk previously estimated that total program costs would
approximate $33.3 million. Niagara Mohawk is currently reevaluating this
estimate and anticipates that it will be lower, since Niagara Mohawk has not
found as many non-compliant components as had originally been anticipated.
This finding is consistent with what other companies have experienced in the
electric and gas utility industry. Total program costs incurred through
June 30, 1999 are $18.8 million of which $13.2 million was expensed and $5.6
million was capitalized. Niagara Mohawk expects to fund the total program
costs through operating cash flows. For a discussion of the costs of large
computer projects that Niagara Mohawk recently implemented and were year
2000 compliant, see Niagara Mohawk's Form 10-K for the fiscal year ended
December 31, 1998, Part II, Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - "Year 2000 Readiness
Disclosure."
Certain statements included in this discussion regarding year 2000 compliance
are forward-looking statements as defined in Section 21E of the Securities
Exchange Act of 1934. These statements include management's best estimates for
completion dates for the various phases and priorities, testing to be performed,
costs to be spent for compliance, and the risks associated with non-compliance
either by Niagara Mohawk or third parties. These forward-looking statements are
subject to various factors which may materially affect Niagara Mohawk's efforts
with year 2000 compliance. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, which could cause a change in the estimated
completion date of a particular phase, the ability to locate and correct all
relevant software and embedded components, the compliance of critical vendors,
as well as neighboring utilities, and similar uncertainties. Niagara Mohawk's
assessments of the effects of year 2000 on Niagara Mohawk are based, in part,
upon information received from third parties and other utilities, and Niagara
Mohawk's reasonable reliance on that information. Therefore, the risk that
inaccurate information is supplied by third parties and other utilities upon
which Niagara Mohawk reasonably relied must be considered as a risk factor that
might affect Niagara Mohawk's year 2000 efforts. Niagara Mohawk is attempting
to reduce the risks by utilizing an organized approach, extensive testing and
contingency planning, and allowance of ample contingency time to address issues
identified by tests.
FINANCIAL POSITION
Holdings and Niagara Mohawk's capital structure at June 30, 1999 and December
31, 1998, was as follows:
<TABLE>
<CAPTION>
JUNE 30, December 31,
% 1999 1998
- ------------------------------ -------- ------------
<S> <C> <C>
HOLDINGS:
Long-term debt . . . . . . . . 64.2 64.6
Preferred stock of subsidiary. 4.9 4.9
Common equity. . . . . . . . . 30.9 30.5
NIAGARA MOHAWK:
Long-term debt . . . . . . . . 65.2 64.6
Preferred stock. . . . . . . . 5.0 4.9
Common equity. . . . . . . . . 29.8 30.5
</TABLE>
The culmination of the MRA significantly increased the leverage of Niagara
Mohawk and Holdings. Through the anticipated increased operating cash flow
resulting from the MRA and POWERCHOICE agreement, including the proceeds from
the sale of the fossil and hydro generation assets, and the planned rapid
repayment of debt, should reduce the leverage in the capital structure of both
entities. Book value of Holdings' common stock was $16.99 per share at June 30,
1999, as compared to $16.92 at December 31, 1998.
EBITDA for the 12 months ended June 30, 1999 was approximately $1.3 billion for
Holdings, an increase of approximately $0.5 billion compared to the 12 months
ended June 30, 1998. This increase is generated almost entirely by Niagara
Mohawk. The improvement in EBITDA is derived primarily from the impacts of the
MRA and POWERCHOICE. EBITDA represents earnings before interest charges,
interest income, income taxes, depreciation and amortization, amortization of
nuclear fuel, allowance for funds used during construction, non-cash regulatory
deferrals and other amortizations, and extraordinary items. EBITDA is a
non-GAAP measure of cash flows and is presented to provide additional
information about Holdings and Niagara Mohawk's ability to meet its future
requirements for debt service. EBITDA should not be considered an alternative
to net income as an indicator of operating performance or as an alternative to
cash flows, as presented on the Consolidated Statement of Cash Flows, as a
measure of liquidity.
Niagara Mohawk has been reviewing its capital structure in light of its
scheduled debt reduction program, its divestiture of its electric generation and
the changing industry. As a result, Niagara Mohawk filed two petitions with the
PSC on July 1, 1999 as follows:
- - REFINANCE PREFERRED STOCK - Niagara Mohawk petitioned the PSC to issue up
to $350 million in preferred stock through December 31, 2000. Niagara Mohawk
intends to use the proceeds to redeem its outstanding preferred stock to take
advantage of lower dividend rates. Niagara Mohawk cannot determine the
outcome or timing of the PSC's decision.
- - PURCHASE COMMON STOCK - Niagara Mohawk petitioned the PSC to purchase up
to $800 million of Holdings' common stock. Niagara Mohawk estimates,
depending on market conditions, that it may purchase up to 40 million
shares of Holdings' common stock over a six year period extending through
2005, of which Holdings Board of Directors has approved a program to
repurchase 20 million shares through December 31, 2001. Niagara Mohawk
cannot determine the outcome or timing of the PSC's decision.
LIQUIDITY AND CAPITAL RESOURCES
(See Niagara Mohawk's Form 10-K for fiscal year ended December 31, 1998, Part
II, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - "Financial Position, Liquidity and Capital Resources").
Niagara Mohawk is obligated to use 85 percent of the proceeds of the sale of its
generation assets to reduce debt outstanding. To date, Niagara Mohawk has
received $780 million on the sale of its coal-fired and hydroelectric generating
plants, and expects to receive an additional $80 million on the sale of its
Oswego plant in 1999. In addition, in June 1999, Niagara Mohawk announced the
sale of its nuclear assets to AmerGen for $135 million, which is subject to
price adjustments depending on the timing of the closing. However, as part of
the agreement, Niagara Mohawk is required to pre-fund the decommissioning funds
to a fixed amount. Niagara Mohawk anticipates that such pre-funding will
require Niagara Mohawk to make an additional payment of $80 - $120 million,
thereby reducing the net proceeds from the sale. With Niagara Mohawk's stronger
operating cash flows and proceeds from sales of its coal, hydro and oil
facilities, approximately $1.2 billion of debt is expected to be retired in 1999
consistent with debt reduction goals. Niagara Mohawk has taken the following
actions in 1999.
- - On June 14, 1999, Niagara Mohawk repurchased and subsequently redeemed
$151.7 million of First Mortgage Bonds with varying interest rates and
maturities. Niagara Mohawk incurred approximately $16.5 million related
to the early redemption of these bonds, including a premium of $13.0 million
for early redemption and unamortized debt expense and debt issuance costs of
$3.5 million. These expenses were reflected as an extraordinary item during
the second quarter of 1999.
- - Niagara Mohawk redeemed its 9.5% series of First Mortgage Bonds totaling
$150 million on July 14, 1999. The cash necessary to redeem these bonds
was held by a trustee in June 1999. This is included in Niagara Mohawk's
June 30, 1999 balance sheet as "Funds held by trustee for refunding of
debt." Niagara Mohawk will expense during the third quarter of 1999
approximately $11.6 million related to the early redemption of these
bonds, including a premium of $8.8 million for early redemption and
unamortized debt expense and debt issuance costs of $2.8 million. These
expenses will be reflected as an extraordinary item during the third quarter
of 1999.
- - On August 5, 1999, Niagara Mohawk made a notification to redeem $500 million
of its Senior Notes. The call will be exercised on September 8, 1999.
The $500 million will be redeemed on a pro rata basis between several series
of its Senior Notes in accordance with the debt provisions. Niagara Mohawk
will redeem the notes at a cash redemption price equal to 100 percent of the
principal plus accrued interest. Niagara Mohawk expects to charge to expense
approximately $8.4 million for unamortized debt issuance expense associated
with these Senior Notes. It is expected that these expenses will also be
recorded as an extraordinary item during the third quarter of 1999. As of
June 30, 1999, the $500 million is included in Niagara Mohawk's balance
sheet in the non-current portion of long-term debt.
- - On July 1, 1999, Niagara Mohawk also made a scheduled payment to retire
upon maturity its 6-1/2% Senior Notes of $300 million.
- - On August 5, 1999, Niagara Mohawk made a notification to redeem all
outstanding Medium Term Notes totaling $20 million. The call will be
exercised on September 8, 1999. Niagara Mohawk will redeem these notes at
a cash redemption price of 100 percent of the principal plus accrued
interest.
On May 28, 1999, Niagara Mohawk entered into an agreement to terminate a PPA
with 12.6 MW of generating capacity for $26 million. Semiannual payments of $4
million, including interest will begin in December 1999. As of June 30, 1999,
Niagara Mohawk has recorded a liability for these future payments and a
corresponding regulatory asset, which will be amortized over a five-year period,
consistent with the POWERCHOICE agreement. On July 15, 1999, Niagara Mohawk
entered into another agreement to terminate a PPA with 32 MW of generating
capacity for $74.5 million. Niagara Mohawk expects to close this transaction
during the third quarter of 1999 and will record a regulatory asset for this
amount, which will also be amortized over a five-year period, consistent with
POWERCHOICE.
During June 1999, Niagara Mohawk's Senior Notes were upgraded to investment
grade. As a result, the common stock dividend limitations under certain
covenants of the Senior Notes are no longer applicable and Niagara Mohawk will
have more flexibility in making common stock dividend payments to Holdings.
However, there are limitations on dividend payments under the POWERCHOICE
agreement. (See Niagara Mohawk's Form 10-K for fiscal year ended December 31,
1998, Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - "Financial Position, Liquidity and Capital
Resources - Common Stock Dividend"). Furthermore, Niagara Mohawk's priority is
to reduce debt over the next few years.
On May 20, 1999, Niagara Mohawk paid a common stock dividend of $30 million to
Holdings. Holdings has used the dividend to further invest in telecommunication
opportunities. On July 26, 1999, Niagara Mohawk declared another common stock
dividend of $34 million to Holdings.
As of June 30, 1999, Niagara Mohawk has $275 million of borrowing capability
under the senior bank facility. Also, Niagara Mohawk has the ability to issue
first mortgage bonds to the extent that there have been redemptions since June
30, 1998. The senior bank facility term expires on June 1, 2000. As a result,
the amount outstanding on this facility at June 30, 1999, $105 million, has been
recorded as a current liability on both Holdings and Niagara Mohawk's balance
sheets.
NET CASH FROM OPERATING ACTIVITIES increased $3,974.9 million for Holdings and
$3,975.9 million for Niagara Mohawk in the six months ended June 30, 1999
primarily due to Niagara Mohawk's receipt of federal income tax refunds in
January 1999 totaling approximately $135 million and improved operating cash
flow improved due to the impacts of the MRA and POWERCHOICE. (See Niagara
Mohawk's Form 10-K for the fiscal year ended December 31, 1998, Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - "Financial Position, Liquidity and Capital Resources"). Offsetting
these improvements in the six months was a reduction in the amount of accounts
receivable sold through cash management.
Holdings and Niagara Mohawk's NET CASH FROM INVESTING ACTIVITIES increased
$429.6 and $456.8 million, respectively in the six months ended June 30, 1999 as
compared to the same period in 1998. These increases are primarily due to the
cash received from the sale of the Huntley and Dunkirk coal-fired generation
assets.
Holdings and Niagara Mohawk's NET CASH FROM FINANCING ACTIVITIES decreased
$3,885.1 and $4,004.3 million due to the early repayment of debt, and the
dividend and related cash transfer of Opinac to Holdings on March 31, 1999.
Financing activities during the first six months of 1998 were positively
impacted by the issuance of the Senior Notes to finance the MRA.
RESULTS OF OPERATIONS
The following discussion presents the material changes in results of operations
for the three months and six months ended June 30, 1999 in comparison to the
same periods in 1998. The results of operations reflect the seasonal nature of
the business, with peak electric loads in summer and winter periods. Gas sales
peak principally in the winter. The earnings for the three-month and six-month
periods should not be taken as an indication of earnings for all or any part of
the balance of the year. Furthermore, future results of operations will be
different from the past in view of the June 30, 1998 termination, restatement or
amendment of IPP contracts and the implementation of POWERCHOICE. With the
consummation of the MRA and the implementation of POWERCHOICE effective
September 1, 1998, Holdings and Niagara Mohawk expect reported earnings for the
five years subsequent to POWERCHOICE to be substantially depressed as a result
of the regulatory treatment of the MRA regulatory asset. This discussion should
also be read in conjunction with other financial and statistical information
appearing elsewhere in this report.
In mid-February 1999, Niagara Mohawk implemented a new Customer Service System
("CSS"). The CSS replaces existing order, billing, collection and other
infrastructural systems and is designed to provide real-time information as well
as a more flexible and streamlined billing system. The new CSS also provides
retail access and unbundled bill functionality required under POWERCHOICE and
addresses Year 2000 compliance. These capabilities could not be developed in
the existing systems.
Niagara Mohawk, like other companies that have implemented similar CSS projects,
has experienced transition periods, characterized by significantly higher
customer call volumes and complaints, billing and data accumulation and
reporting issues, and other problems that impact productivity and costs. In
implementing a system as complex as CSS, Niagara Mohawk anticipated that the
transition would also be complicated by changes in the information and choices
provided to customers pursuant to POWERCHOICE. Niagara Mohawk has taken steps
prior to and during the transition period to prioritize and respond to problems.
Although the length and degree of the transition period cannot presently be
predicted, Niagara Mohawk is aware that transition periods at other companies
have been six months or longer.
On May 11, 1999, Niagara Mohawk was directed to file a report with the PSC and
the New York State Consumer Protection Board detailing steps taken by Niagara
Mohawk in response to problems with the CSS system. The report, filed on May
19, 1999, outlines how Niagara Mohawk intends to rectify the problems
encountered. On July 7, 1999, Niagara Mohawk provided the PSC with a status
report of results and actions taken to resolve the problems noted, which
outlined a reduction in customer call volumes and complaints, and improved bill
quality.
The CSS transition period presents several financial exposures. Although there
are known billing issues, Niagara Mohawk believes that overall recorded revenues
fairly reflect the revenues of Niagara Mohawk over this period. Outstanding
accounts receivables have increased, and Niagara Mohawk increased the reserve
for bad debts with a corresponding charge to bad debt expense by approximately
$10 million during the first quarter of 1999 to provide for the increased
exposure to collection risk. No significant further adjustment to the reserve
for bad debts due to CSS issues was necessary in the second quarter. Niagara
Mohawk is taking aggressive action to reduce its outstanding accounts receivable
balance relating to this transition period, so that the reserve for bad debts
can be returned to a level appropriate in the normal course of business.
Niagara Mohawk has been made aware of the PSC's intent to assess the development
and implementation of the CSS project. Niagara Mohawk is unable to predict the
outcome of a PSC investigation. Further, POWERCHOICE provides for penalties in
the event certain customer related performance metrics are not met. The maximum
penalty for PSC complaints and residential customer satisfaction is $4.4 million
per year. Niagara Mohawk anticipates that the performance metric relating to
customer complaints will be met, assuming that current trends prevail.
Therefore, Niagara Mohawk does not anticipate any penalties associated with that
metric. However, Niagara Mohawk is unable to determine whether it will be able
to meet the performance metric associated with the customer satisfaction index.
The maximum penalty associated with the customer satisfaction index is $2.2
million. The results of the customer satisfaction index are expected to be
known during September 1999.
Niagara Mohawk continues to assess the increased costs it will incur to complete
the transition to CSS. Costs incurred prior to implementation of CSS in
February 1999 were generally capitalized. Niagara Mohawk expected to incur
costs chargeable to expense in 1999 for maintenance of CSS. Incurred costs were
also expected to be higher in the first several years subsequent to
implementation as knowledge and experience is transferred from the vendor to
Niagara Mohawk. The post-implementation system performance issues discussed
above are resulting in increased costs, which are not expected to extend beyond
1999, although no assurance can be given. Based on the actual and anticipated
scope of effort to be completed in 1999, total CSS-related charges to expense,
exclusive of bad debts, are estimated to be $36 million, of which approximately
$14 million relates to expected maintenance and knowledge transfer activities.
THREE MONTHS ENDED JUNE 30, 1999 VERSUS THREE MONTHS ENDED JUNE 30, 1998
- -------------------------------------------------------------------------
Holdings:
- ---------
Holdings experienced a loss during the second quarter of 1999 of $36.0 million
or 19 cents per share, as compared with a Niagara Mohawk loss of $150.6 million
or $1.04 per share for the second quarter of 1998. Second quarter 1999 results
reflect the impact from Niagara Mohawk's MRA and POWERCHOICE, which have
resulted in lower aggregate fuel and purchased electricity costs, partly offset
by increased interest costs, resulting in improved earnings by $38.3 million or
20 cents per share. However, the amortization of the MRA regulatory asset had a
non-cash earnings impact of $62.8 million or 34 cents per share. Second quarter
1999 results were also impacted by Niagara Mohawk's early redemption of First
Mortgage Bonds, which reduced earnings by $10.8 million or 6 cents per share and
is reflected as an extraordinary item. Second quarter 1998 results were
negatively impacted by a non-cash write-off of $263.2 million, or $1.18 per
share, associated with the portion of the MRA disallowed in rates by the PSC.
Niagara Mohawk:
- ---------------
Niagara Mohawk also incurred a loss during the second quarter of 1999. This
loss as compared to the same period in 1998 is explained above in the discussion
of Holdings' loss for the same period.
REVENUES
- --------
REGULATED ELECTRIC REVENUES decreased $35.4 million or 4.5% from the second
quarter of 1998. The decrease is primarily due to the lower residential and
commercial rates as a result of POWERCHOICE. Sales to other electric systems
were also lower in the second quarter of 1999 primarily due to lower sales to
one utility. These decreases were partially offset by an increase in
miscellaneous revenues during the second quarter of 1999 primarily due to the
change in unbilled revenues. In accordance with POWERCHOICE, Niagara Mohawk
recognizes changes in unbilled revenues in its results of operations, whereas,
in the second quarter of 1998, the effects of the changes in accrued unbilled
revenues were deferred. There were no significant unanticipated sales variances
during the quarter.
UNREGULATED ELECTRIC REVENUES increased $13.4 million or 53.1% from the second
quarter of 1998 primarily as a result of Niagara Mohawk Energy, Inc.'s ("Niagara
Mohawk Energy") increased retail activity.
REGULATED GAS REVENUES decreased $5.0 million or 4.0% in the second quarter of
1999 from the comparable period in 1998, primarily as a result of a decrease in
sales due to warmer weather.
UNREGULATED GAS REVENUES decreased $3.2 million or 38.0% in the second quarter
of 1999 from the comparable period in 1998, primarily as a result of Niagara
Mohawk Energy having reduced trading activity.
OPERATING EXPENSES
- -------------------
Niagara Mohawk's ELECTRICITY PURCHASED decreased $118.9 million or 39.3% in the
second quarter of 1999, primarily as a result of decreased payments to IPPs.
The decrease in IPP purchases is primarily the result of the MRA agreement,
which resulted in the termination of 18 PPAs for 1,092 MW, restatement of 8 PPAs
for 535 MW and the amendment of one PPA for 42 MW. The decrease is offset in
part, by purchases under TPAs from Niagara Mohawk's previously owned coal
plants.
Niagara Mohawk's FUEL FOR ELECTRIC GENERATION decreased $4.2 million or 8.2% as
compared to the second quarter in 1998, primarily as a result of the sale of its
two coal-fired generation plants and the outages at Unit 1 and Unit 2. In
accordance with POWERCHOICE, the electric fuel adjustment clause was
discontinued effective September 1, 1998.
The remainder of Niagara Mohawk's load requirements for the second quarter of
1999 were met through purchases from other utilities.
Holdings' FUEL FOR ELECTRIC GENERATION and ELECTRICITY PURCHASED is explained by
Niagara Mohawk's activity, as well as an increase in unregulated supply costs of
$0.7 million or 1.9% in the second quarter of 1999, primarily due to higher
sales.
Niagara Mohawk's GAS PURCHASED expense decreased $9.7 million in the second
quarter of 1999. This was a result of a $5.0 million decrease in purchased gas
costs and certain other items recognized and recovered through the regulated gas
commodity cost adjustment clause, a 4.1% decrease in the average cost per Dth
purchased ($3.1 million) and a $1.6 million decrease in spot market sales (sales
for resale), which are generally from higher priced gas, and therefore, yield
margins that are substantially lower than traditional sales to ultimate
customers. Niagara Mohawk's net cost per Dth sold, as charged to expense,
excluding spot market purchases, decreased to $4.26 in 1999 from $4.44 in 1998.
Holdings' GAS PURCHASED expense reflects Niagara Mohawk's activity, as well as a
decrease of $3.1 million in the second quarter of 1999 primarily as a result of
lower unregulated sales.
OTHER TAXES for both Holdings and Niagara Mohawk have decreased as compared to
the second quarter of 1998 primarily as a result of a reduction in the New York
Sate GRT tax rate beginning in October 1998, as well as a reduction in property
taxes in connection with the sale of Niagara Mohawk's coal-fired generation
plants.
In approving POWERCHOICE, the PSC ordered that any savings from any reduction in
the interest associated with the debt issued in connection with the MRA
financing as compared to assumptions underlying the Company's POWERCHOICE filing
be deferred for future disposition. Holdings and Niagara Mohawk's OTHER INCOME
decreased primarily due to the recording of a regulatory liability relating to
the MRA debt interest rate savings liability.
Holdings and Niagara Mohawk's INTEREST CHARGES increased mainly due to the debt
incurred as part of the MRA.
The increase in Holdings and Niagara Mohawk's FEDERAL AND FOREIGN INCOME TAXES
of approximately $72 million is due to higher second quarter book taxable
income. Included within the second quarter 1999 results is approximately $8.5
million of previously deferred investment tax credits associated with the
coal-fired generation plants which were sold. Niagara Mohawk believes this
accounting to be consistent with applicable tax laws.
SIX MONTHS ENDED JUNE 30, 1999 VERSUS SIX MONTHS ENDED JUNE 30, 1998
- --------------------------------------------------------------------
Holdings:
- ---------
Earnings for the first six months of 1999 were $14.8 million or 8 cents per
share, as compared with a Niagara Mohawk loss of $139.4 million or 96 cents per
share for the first six months of 1998. Earnings for the first six months of
1999 reflect the impact from Niagara Mohawk's MRA and POWERCHOICE, which have
resulted in lower aggregate fuel and purchased electricity costs, partly offset
by increased interest costs, resulting in improved earnings by $96.1 million or
51 cents per share. However, the amortization of the MRA regulatory asset had a
non-cash earnings impact of $125.6 million or 67 cents per share. Earnings for
the first six months of 1999 were also impacted by Niagara Mohawk's early
redemption of First Mortgage Bonds, which reduced earnings by $10.8 million or 6
cents per share and is reflected as an extraordinary item. Earnings for the
first six months of 1998 reflect the incremental costs of the 1998 ice storm,
which reduced earnings by $40.9 million or 28 cents per share and a non-cash
write-off of $263.2 million, or $1.18 per share associated with the portion of
the MRA disallowed in rates by the PSC.
Niagara Mohawk:
- ---------------
Niagara Mohawk reported earnings of $14.1 million for the first six months of
1999. The variations in earnings as compared to the same period in 1998 are
noted above in the discussion of Holdings' earnings for the same period.
REVENUES AND SALES
- ------------------
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
ELECTRIC REVENUE (THOUSANDS) SALES (GWH)
----------------------------------- -----------------------
% %
1999 1998 Change 1999 1998 Change
------------- ------------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
REGULATED:
Residential. . . . . . $ 647,277 $ 612,754 5.6 5,288 4,929 7.3
Commercial . . . . . . 587,900 600,977 (2.2) 5,882 5,658 4.0
Industrial . . . . . . 226,676 246,918 (8.2) 3,279 3,467 (5.4)
Industrial - Special . 32,618 31,501 3.5 2,242 2,290 (2.1)
Other. . . . . . . . . 21,960 27,500 (20.1) 87 119 (26.9)
------------- ------------- ------ ------- ------- ------
Regulated Total to
Ultimate Consumers. . 1,516,431 1,519,650 (0.2) 16,778 16,463 1.9
Other Electric Systems 22,872 61,261 (62.7) 922 2,419 (61.9)
Distribution of Energy 28,733 13,895 106.8 - -
Miscellaneous. . . . . 29,596 51,645 (42.7) - -
------------- ------------- ------ ------- ------- ------
Total Regulated . . . . . 1,597,632 1,646,451 (3.0) 17,700 18,882 (6.3)
UNREGULATED:
Wholesale & Retail . . 53,555 75,579 (29.1) 1,832 2,914 (37.1)
------------- ------------- ------ ------- ------- ------
TOTAL . . . . . . . . . . $ 1,651,187 $ 1,722,030 (4.1) 19,532 21,796 (10.4)
============= ============= ====== ======= ======= ======
</TABLE>
REGULATED ELECTRIC REVENUES decreased $48.8 million or 3.0% from the first six
months of 1998. The new CSS system has converted all customers previously
billed on a bi-monthly basis to a monthly basis, which has resulted in an
increase in billed revenue, with corresponding decreases in accrued unbilled
revenues. In accordance with POWERCHOICE, Niagara Mohawk recognizes
changes in accrued unbilled electric revenues in its results of operations,
whereas, in the first six months of 1998, the effects of the changes in accrued
unbilled revenues were deferred. As a result, miscellaneous revenues, which
include the unbilled revenues, have decreased by approximately $22.0 million.
Commercial and industrial revenues have decreased in the first six months of
1999 as compared to 1998 due to lower POWERCHOICE rates and commercial and
industrial customers switching energy providers as a result of open access.
When customers choose an alternative supplier of energy, Niagara Mohawk
continues to collect delivery charges and the CTC, which are reflected in the
table above as "Distribution of Energy." In circumstances where Niagara Mohawk
sells energy to energy service companies for resale, those revenues are included
in "Other Electric Systems." Therefore, overall electric revenues were not
materially impacted by open access. Sales to other electric systems were also
lower in the first six months of 1999 primarily due to reduced sales to one
utility. There were no significant unanticipated sales variances during the
first six months of 1999.
UNREGULATED ELECTRIC REVENUES decreased $22.0 million or 29.1% from the first
six months of 1998 primarily as a result of Niagara Mohawk Energy having reduced
trading activities.
SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
GAS REVENUE (THOUSANDS) SALES (THOUSANDS OF DTH)
------------------------------- -------------------------
% %
1999 1998 Change 1999 1998 Change
----------- ----------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
REGULATED:
Residential . . . . . $ 253,095 $ 248,222 2.0 37,786 33,790 11.8
Commercial. . . . . . 73,240 77,622 (5.6) 12,135 12,147 (0.1)
Industrial. . . . . . 1,544 2,377 (35.0) 316 497 (36.4)
----------- ----------- ------ -------- -------- -------
Regulated Total to
Ultimate Consumers . 327,879 328,221 (0.1) 50,237 46,434 8.2
Transportation of
Customer-Owned Gas 30,318 29,658 2.2 68,632 73,566 (6.7)
Spot Market Sales . . 1,373 2,732 (49.7) 698 1,390 (49.8)
Miscellaneous . . . . 9,280 2,248 312.8 6 10 (40.0)
----------- ----------- ------ -------- -------- ------
Total Regulated. . . . . 368,850 362,859 1.7 119,573 121,400 (1.5)
UNREGULATED:
Wholesale & Retail. . 13,361 23,355 (42.8) 4,826 8,888 (45.7)
----------- ----------- ------ -------- -------- ------
TOTAL. . . . . . . . . . $ 382,211 $ 386,214 (1.0) 124,399 130,288 (4.5)
=========== =========== ====== ======== ======== ======
</TABLE>
REGULATED GAS REVENUES increased $6.0 million or 1.7% in the first six months
of 1999 from the comparable period in 1998, primarily as a result of an increase
in sales to residential customers, resulting from colder weather during first
quarter of 1999. Although residential sales increased, the cost of gas supplied
decreased. Since the cost of gas delivered is a pass-through to customers, gas
revenues will fluctuate as gas commodity costs fluctuate. Revenues and sales
also increased as a result of beginning to bill customers on a monthly basis
rather than a bi-monthly basis. Most customers that were billed on a bi-monthly
basis were residential. Pursuant to the gas settlement changes in accrued
unbilled gas revenues are deferred. Miscellaneous gas revenues increased due to
revenue earned from revenue sharing mechanisms allowed in Niagara Mohawk's gas
rates as a result of lowering the cost of gas purchases. See Niagara Mohawk's
Form 10-K for the fiscal year ended December 31, 1998, Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Other Federal and State Regulatory Initiatives - Multi-Year Gas
Rate Settlement Agreement," for an explanation of Niagara Mohawk's rate
agreement and revenue sharing mechanisms.
UNREGULATED GAS REVENUES decreased $10.0 million or 42.8% in the first six
months of 1999 from the comparable period in 1998, primarily as a result of
Niagara Mohawk Energy having reduced trading activity.
OPERATING EXPENSES
- ------------------
SIX MONTHS ENDED JUNE 30,
(NIAGARA MOHAWK ONLY)
<TABLE>
<CAPTION>
GWH COST (MILLIONS) CENTS/KWH
---------------------------- ------------------------ ------------
1999 1998 % Chg 1999 1998 % Chg 1999 1998
------- ------- ------- ------- ------- ------- ---- ----
REGULATED FUEL FOR ELECTRIC GENERATION:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Coal . . . . . . . . . . . . . . . . 2,989 3,768 (20.7) $ 44.5 $ 56.7 (21.5) 1.5 1.5
Oil. . . . . . . . . . . . . . . . . 1,089 581 87.4 31.6 21.4 47.7 2.9 3.7
Natural Gas. . . . . . . . . . . . . 268 221 21.3 8.3 6.5 27.7 3.1 2.9
Nuclear. . . . . . . . . . . . . . . 3,470 3,433 1.1 16.7 16.1 3.7 0.5 0.5
Hydro. . . . . . . . . . . . . . . . 1,303 1,627 (19.9) - - - - -
------- ------- ------- ------- ------- ------- ---- ----
Sub-total electric generation . 9,119 9,630 (5.3) 101.1 100.7 0.4 1.1 1.0
Deferral . . . . . . . . . . . . . . 3.0 (2.3) (230.4)
------- ------- ------- ------- ------- ------- ---- ----
Total electric generation . . . 9,119 9,630 (5.3) 104.1 98.4 5.8 1.1 1.0
------- ------- ------- ------- ------- ------- ---- ----
ELECTRICITY PURCHASED:
REGULATED:
IPPs:
Capacity . . . . . . . . . . . $ 7.3 $123.0 (94.1)
Energy and taxes . . . . . . . 3,862 6,397 (39.6) 238.4 452.9 (47.4) 6.2 7.1
------- ------- ------- ------- ------- ------- ---- ----
Total IPP purchases . . . . 3,862 6,397 (39.6) 245.7 575.9 (57.3) 6.4 9.0
Other purchases . . . . . . . . . 5,481 4,262 28.6 98.1 56.7 73.0 1.8 1.3
------- ------- ------- ------- ------- ------- ---- ----
Sub-total regulated purchases. 9,343 10,659 (12.3) 343.8 632.6 (45.7) 3.7 5.9
------- ------- ------- ------- ------- ------- ---- ----
Deferral. . . . . . . . . . . . . 0.5 (6.0) (108.3)
------- ------- ------- ------- ------- ------- ---- ----
Total regulated purchases . . . 9,343 10,659 (12.3) 344.3 626.6 (45.1) 3.7 5.9
------- ------- ------- ------- ------- ------- ---- ----
Total . . . . . . . . 18,462 20,289 (9.0) $448.4 $725.0 (38.2) 2.4 3.6
======= ======= ======= ======= ======= ======= ==== ====
</TABLE>
Niagara Mohawk's ELECTRICITY PURCHASED decreased $282.3 million or 45.1% in the
first six months of 1999, primarily as a result of decreased payments to IPPs.
The decrease in IPP purchases is primarily the result of the MRA agreement,
which resulted in the termination of 18 PPAs for 1,092 MW, restatement of eight
PPAs for 535 MW and the amendment of one PPA for 42 MW. Niagara Mohawk has also
had an increase in electricity purchases from other utilities to meet remaining
load requirements. These costs will be further reduced as Niagara Mohawk
negotiates settlements with other IPPs during 1999. However, purchased power
costs will increase in the future as Niagara Mohawk's generation asset sales are
completed.
Niagara Mohawk's FUEL FOR ELECTRIC GENERATION increased $5.7 million as compared
to the first six months in 1998 primarily due to a fuel cost adjustment. In
accordance with POWERCHOICE, the electric fuel adjustment clause was
discontinued. However, during the first quarter of 1999, Niagara Mohawk
recorded a $3.0 million liability to customers resulting from PSC audit
adjustments of prior years fuel costs. Fuel costs for electric generation
should decrease in future months as Niagara Mohawk completes the sales of its
generation assets.
Holdings' FUEL FOR ELECTRIC GENERATION and ELECTRICITY PURCHASED is explained by
Niagara Mohawk's activity, as well as a decrease in unregulated supply costs of
$35.6 million or 41.2% in the first six months of 1999, primarily due to lower
sales.
Niagara Mohawk's GAS PURCHASED expense decreased $17.9 million in the first six
months of 1999. This was a result of a $14.3 million decrease in purchased gas
costs and certain other items recognized and recovered through the regulated gas
commodity cost adjustment clause, a 11.2 % decrease in the average cost per Dth
purchased ($18.0 million), and a $1.4 million decrease in spot market sales
(sales for resale), which are generally from higher priced gas, and therefore,
yield margins that are substantially lower than traditional sales to ultimate
customers. These decreases were offset by a 4.6 million increase in Dth
purchased and withdrawn from storage for ultimate consumers sales ($15.8).
Niagara Mohawk's net cost per Dth sold, as charged to expense, excluding spot
market purchases, decreased to $3.08 in 1999 from $3.47 in 1998.
Holdings' GAS PURCHASED expense reflects Niagara Mohawk's activity, as well as a
decrease of $10.4 million in the first six months of 1999 primarily as a result
of lower unregulated sales.
OTHER OPERATION AND MAINTENANCE EXPENSES for the first six months of 1999 of
both Holdings and Niagara Mohawk have decreased primarily as a result of the
1998 ice storm charges incurred during the first quarter of 1998.
DEPRECIATION AND AMORTIZATION EXPENSE for both Holdings and Niagara Mohawk have
increased for the first six months of 1999 as a result of placing in service
several computer system projects with depreciable lives that are significantly
shorter than typical transmission and distribution assets.
OTHER TAXES for both Holdings and Niagara Mohawk have decreased as compared to
the first six months of 1998 primarily as a result of a reduction in the New
York State GRT tax rate beginning in October 1998, as well as a reduction in
property taxes in connection with the sale of Niagara Mohawk's coal-fired
generation plants.
In approving POWERCHOICE, the PSC ordered that any savings from any reduction in
the interest associated with the debt issued in connection with the MRA
financing as compared to assumptions underlying the Company's POWERCHOICE filing
be deferred for future disposition. Holdings and Niagara Mohawk's OTHER INCOME
decreased primarily due to the recording of a regulatory liability relating to
the MRA debt interest rate savings liability.
Holdings and Niagara Mohawk's INTEREST CHARGES increased mainly due to the debt
incurred as part of the MRA.
The increase in Holdings and Niagara Mohawk's FEDERAL AND FOREIGN INCOME TAXES
of approximately $80 million is due to higher book taxable income in the first
six months of 1999 as compared to 1998. Included in the earnings for the first
six months of 1999 is approximately $8.5 million of previously deferred
investment tax credits associated with the coal-fired generation plants which
were sold. Niagara Mohawk believes this accounting is consistent with
applicable tax laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During June 1999, Niagara Mohawk completed the sale of its Huntley and Dunkirk
coal-fired generation plants. As part of the sales agreement, Niagara Mohawk
entered into two TPAs with NRG, which convert to financial swaps. As of June
30, 1999, Niagara Mohawk has recorded an $82.6 million swap contract liability
for the present value difference between the contract energy prices and
projected market prices and has recorded a corresponding swap contract
regulatory asset. The discount rate used was 8.7%. The amount of the recorded
liability and regulatory asset is sensitive to changes in discount rate and
anticipated future market prices. However, these changes will not impact the
future cash flow of Niagara Mohawk when considering the all-in price of the
notional quantities of energy. See Item 1. Financial Statements, Note 3. Rate
and Regulatory Issues and Contingencies for a discussion regarding the terms of
these TPAs.
There were no material changes in Holdings market risk or market risk
strategies during the six months ended June 30, 1999. For a detailed discussion
of market risk, see Niagara Mohawk's Form 10-K for fiscal period ended December
31, 1998, Part II, Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
PART II
-------
ITEM 1. LEGAL PROCEEDINGS
Inter-Power Litigation
- ----------------------
In March 1993, Inter-Power of New York, Inc. ("Inter-Power") filed a complaint
against Niagara Mohawk and certain of its officers and employees in the NYS
Supreme Court. Inter-Power alleged, among other matters, fraud, negligent
misrepresentation and breach of contract in connection with Niagara Mohawk's
alleged termination of a PPA in January 1993. The plaintiff sought enforcement
of the original contract or compensatory and punitive damages in an aggregate
amount that would not exceed $1 billion, excluding pre-judgment interest.
In early 1994, the NYS Supreme Court dismissed two of the plaintiff's
claims; this dismissal was upheld by the Appellate Division, Third Department of
the NYS Supreme Court. Subsequently, the NYS Supreme Court granted Niagara
Mohawk's motion for summary judgment on the remaining causes of action in
Inter-Power's complaint. In August 1994, Inter-Power appealed this decision and
on July 27, 1995, the Appellate Division, Third Department affirmed the granting
of summary judgment as to all counts, except for one dealing with an alleged
breach of the PPA relating to Niagara Mohawk's having declared the agreement
null and void on the grounds that Inter-Power had failed to provide it with
information regarding its fuel supply in a timely fashion. This one breach of
contract claim was remanded to the NYS Supreme Court for further consideration.
In January 1998, the NYS Supreme Court granted Niagara Mohawk's motion for
summary judgment on the sole remaining claim in this lawsuit and dismissed this
lawsuit in its entirety. In January 1998, Inter-Power filed a notice of appeal
and perfected the appeal in October 1998. The appeal was argued before the
Appellate Division, Third Department, on January 15, 1999. On March 18, 1999,
the Appellate Division, Third Department affirmed the dismissal of the last
remaining cause of action. On April 30, 1999, Inter-Power filed with the Court
of Appeals a motion seeking leave of court to file an appeal in this matter and
on May 10, 1999, Niagara Mohawk filed its response. On July 1, 1999, the Court
of Appeals denied Inter-Power's motion. Niagara Mohawk is unable to predict the
timing and outcome of this matter.
NorCon Litigation
- -----------------
On February 4, 1994, Niagara Mohawk notified NorCon Partners, LP ("NorCon") of
its demand for adequate assurance that NorCon would perform all of their future
repayment obligations as required by agreement.
On March 7, 1994, NorCon filed a complaint in the U.S. District Court seeking to
enjoin Niagara Mohawk from terminating a PPA between the parties and seeking a
declaratory judgment that Niagara Mohawk has no right to demand additional
security or other assurances of NorCon's future performance under the PPA.
NorCon sought a temporary restraining order against Niagara Mohawk to prevent
Niagara Mohawk from taking any action on its February 4, 1994 letter. On March
14, 1994, the Court entered the interim relief sought by NorCon. On April 4,
1994, Niagara Mohawk filed its answer and counterclaim for declaratory judgment
relating to Niagara Mohawk's exercise of its right to demand adequate assurance.
On November 2, 1994, NorCon filed for summary judgment. On February 6, 1996,
the U.S. District Court granted NorCon's motion for summary judgment and ruled
that under New York Law, Niagara Mohawk did not have the right to demand
adequate assurances of future performance. On March 26, 1997, the U.S. Court of
Appeals for the Second Circuit ordered that the question of whether there exists
under New York commercial law the right to demand firm security on an electric
contract should be certified to the New York Court of Appeals, the highest New
York court, for final resolution. The Second Circuit order effectively stayed
the U.S. District Court's order against Niagara Mohawk, pending final
disposition by the New York Court of Appeals. A motion to stay further
proceedings was made since this contract was included in the MRA.
NorCon subsequently dropped out of the MRA, and arguments were held on
October 22, 1998 in the New York Court of Appeals at the request of Niagara
Mohawk. On December 1, 1998, the New York Court of Appeals ruled in favor of
Niagara Mohawk's right to demand adequate assurance of future performance on an
electric contract. Resolution of the remaining issues will be determined in the
U.S. District Court for the Southern District of New York. A motion for summary
judgment by NorCon was argued on May 21, 1999 in the U.S. District Court. The
motion was denied and the trial began on June 22, 1999 in the Federal District
Court in New York City. Testimony was completed on July 1, 1999 and post trial
briefs were due on August 9, 1999, with arguments scheduled for October 14, 1999
in the U.S. District Court for the Southern District of New York. Niagara
Mohawk is unable to predict the timing and outcome of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Holdings' annual meeting on May 18, 1999,
(1) The Election of Directors was as follows:
Shares Withheld
Shares Voted For Authority
---------------- ---------------
William F. Allyn 150,213,159 5,479,840
William E. Davis 149,420,314 6,272,685
William J. Donlon 148,895,021 6,797,978
Anthony H. Gioia 149,970,315 5,722,684
Dr. Patti McGill Peterson 150,119,964 5,573,035
(2) A shareholder proposal relating to Holdings' endorsement of the
Coalition for Environmentally Responsible Economies Principles as part
of its commitment to be publicly accountable for its environmental impact
was rejected by a vote of 11,085,381 for, 119,274,705 against, 6,138,014
abstentions, and 19,194,899 broker non-votes.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10-1 - Amendment to the Deferred Compensation Agreement.
Exhibit 11 - Computation of the Average Number of Shares of Common Stock
Outstanding for the Three Months and Six Months Ended June 30, 1999 and
1998.
Exhibit 12a - Statement Showing Computations of Ratio of Earnings to Fixed
Charges for the Twelve Months Ended June 30, 1999 for Niagara Mohawk
Holdings, Inc.
Exhibit 12b - Statement Showing Computations of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends for the Twelve Months Ended June 30, 1999 for Niagara Mohawk
Power Corporation.
Exhibit 15 - Accountants' Acknowledgement Letter.
Exhibit 27a - Financial Data Schedule for Niagara Mohawk Holdings, Inc.
Exhibit 27b - Financial Data Schedule for Niagara Mohawk Power Corporation
In accordance with Paragraph 4(iii) of Item 601(b) of Regulation S-K, the
Company agrees to furnish to the Securities and Exchange Commission, upon
request, a copy of the agreements comprising the $804 million senior debt
facility that the Company completed with a bank group during March 1996 and
subsequently amended (effective June 30, 1998). The total amount of
long-term debt authorized under such agreement does not exceed 10 percent
of the total consolidated assets of the Company and its subsidiaries.
(b) Reports on Form 8-K:
NIAGARA MOHAWK HOLDINGS, INC.
-----------------------------
Form 8-K Reporting Date - June 25, 1999
Items Reported:
(1) Item 5. Other Events.
(a) On June 24, 1999, registrant issued a press release regarding an
agreement to sell Niagara Mohawk's ownership of Unit 1 and Unit 2
nuclear plants.
(b) On June 24, 1999, registrant issued a press release regarding the
automatic shutdown of Niagara Mohawk's Unit 2 due to a malfunction
in a device that controls water levels in the plant.
(c) On June 11, 1999, registrant issued a press release regarding the
closing on the sale of Niagara Mohawk's Huntley and Dunkirk
coal-fired electric generating stations.
(d) On June 14, 1999, registrant issued a press release regarding
Niagara Mohawk's early redemption of $150 million 9.5% series
of first mortgage bonds due March 1, 2021.
(2) Item 7. Financial Statements and Exhibits.
Exhibits required to be filed by Item 601 of Regulation S-K.
Form 8-K Reporting Date - August 2, 1999
Items Reported:
(1) Item 5. Other Events.
(a) Registrant filed press release regarding 1999-second quarter
earnings.
(b) On July 29, registrant issued press release regarding a program to
repurchase common stock and redeem $520 million debt.
(c) On August 2, 1999, registrant issued press release regarding the
closing on the sale of Niagara Mohawk's hydro generation assets.
(2) Item 7. Financial Statements and Exhibits.
Exhibits required to be filed by Item 601 of Regulation S-K.
NIAGARA MOHAWK POWER CORPORATION
--------------------------------
Form 8-K Reporting Date - June 25, 1999
Items Reported:
(1) Item 5. Other Events.
(a) On June 24, 1999, the registrant issued a press release regarding
an agreement to sell its ownership of Unit 1 and Unit 2 nuclear
plants.
(b) On June 24, 1999, the registrant issued a press release regarding
the automatic shutdown of Unit 2 due to a malfunction in a device
that controls water levels in the plant.
(c) On June 11, 1999, the registrant issued a press release regarding
the closing on the sale of its Huntley and Dunkirk coal-fired
electric generating stations.
(d) On June 14, 1999, the registrant issued a press release regarding
the early redemption of $150 million 9.5% series of first mortgage
bonds due March 1, 2021.
(2) Item 7. Financial Statements and Exhibits.
Exhibits required to be filed by Item 601 of Regulation S-K.
Form 8-K Reporting Date - August 2, 1999
Items Reported:
(1) Item 5. Other Events.
(a) Registrant filed press release regarding 1999-second quarter
earnings of Holdings.
(b) On July 29, 1999, registrant filed press release regarding a
program to repurchase Holdings' common stock and redeem $520
million debt.
(c) On August 2, 1999, registrant issued press release regarding
the closing on the sale of its hydro generation assets.
(2) Item 7. Financial Statements and Exhibits.
Exhibits required to be filed by Item 601 of Regulation S-K.
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
NIAGARA MOHAWK HOLDINGS, INC.
(Registrant)
Date: August 13, 1999 By /s/Steven W. Tasker
-----------------------------
Steven W. Tasker
Vice President-Controller and
Principal Accounting Officer
NIAGARA MOHAWK POWER CORPORATION
(Registrant)
Date: August 13, 1999 By /s/Steven W. Tasker
-----------------------------
Steven W. Tasker
Vice President-Controller and
Principal Accounting Officer
<PAGE>
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10-1 Amendment to the Deferred Compensation Agreement
11 NIAGARA MOHAWK HOLDINGS, INC.
Computation of the Average Number of Shares
of Common Stock Outstanding for the Three
Months and Six Months Ended June 30, 1999
and 1998.
12a NIAGARA MOHAWK HOLDINGS, INC.
Statement Showing Computations of Ratio of
Earnings to Fixed Charges for the Twelve Months Ended
June 30, 1999.
12b NIAGARA MOHAWK POWER CORPORATION
Statement Showing Computations of Ratio of
Earnings to Fixed Charges and Ratio of
Earnings to Fixed Charges and Preferred Stock
Dividends for the Twelve Months Ended
June 30, 1999.
15 Accountants' Acknowledgement Letter.
27a NIAGARA MOHAWK HOLDINGS, INC.
Financial Data Schedule.
27b NIAGARA MOHAWK POWER CORPORATION
Financial Data Schedule.
<PAGE>
EXHIBIT 10-1
NIAGARA MOHAWK HOLDINGS, INC.
DEFERRED COMPENSATION PLAN
As Established Effective January 1, 1994
Revised: October 23, 1997
December 10, 1998
June 15, 1999
NIAGARA MOHAWK HOLDINGS, INC.
DEFERRED COMPENSATION PLAN
1. PURPOSE
The purpose of the Niagara Mohawk Holdings, Inc. Deferred Compensation
Plan is to provide a select group of management or highly compensated
employees of the Company and its subsidiaries with the opportunity to
defer the current receipt of cash compensation otherwise due them. The
Plan is intended to constitute a "top hat" plan within the meaning of
Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement
Income Security Act of 1974, as amended.
2. DEFINITIONS
"Administrator" means the Board or its designee, the Compensation and
Succession Committee of the Board, which shall be responsible for the
administration of this Plan.
"Board" means the Board of Directors of the Company.
"Company" means Niagara Mohawk Holdings, Inc., its successors and assigns.
"Change in Control" shall have the meaning set forth in Appendix A hereto.
"Constructive Termination" means the Participant's deemed termination of
employment with the Company by reason of any of the following events which
occurs within 24 full calendar months after a Change in Control:
(i) the Company assigns any duties to the Participant which are
materially inconsistent with the Participant's position, duties,
offices, responsibilities, or reporting requirements immediately prior
to a Change in Control; or
(ii) the Company reduces the Participant's Salary, including
deferrals, as in effect immediately prior to a Change in Control; or
(iii) the Company discontinues any bonus or other compensation plan
or any other benefit, stock ownership plan, stock purchase plan, stock
option plan, life insurance plan, health plan, disability plan or
similar plan (as the same existed immediately prior to the Change in
Control) and in lieu thereof does not make available plans providing at
least comparable benefits; or
(iv) the Company takes action which adversely affects the
Participant's participation in, or eligibility for, or materially
reduces the Participant's benefits under, any of the plans described in
(iii) above, or deprives the Participant of any material fringe benefit
enjoyed by the Participant immediately prior to the Change in Control,
or fails to provide the Participant with the number of paid vacation
days to which the Participant was entitled in accordance with normal
vacation policy immediately prior to the Change in Control; or
(v) the Company requires the Participant to be based at any office or
location other than one within a 50-mile radius of the office or
location at which the Participant was based immediately prior to the
Change in Control; or
(vi) the Company purports to terminate the Participant's employment
otherwise than as expressly permitted by his or her employment
agreement, if any; or
(vii) the Company fails to comply with and satisfy Section 12.2 of
the Plan.
"Deferral Account" means the Participant's individual account established
on his or her behalf pursuant to the Plan.
"Eligible Employee" means a highly paid Employee or a management Employee
who has been selected by the Administrator as eligible to participate in
the Plan.
"Employee" means an employee of the Company or its subsidiaries.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Incentive Award" means an award, if any, provided to an Eligible Employee
under the Company's Annual Officer Incentive Compensation Plan, Stock
Incentive Plan, or Long-Term Incentive Plan, excluding any awards of Stock
Appreciation Rights under such Plans.
"Participant" means an Eligible Employee who has elected under the terms
and conditions of the Plan to defer payment of a portion of Salary or all
or a portion of an Incentive Award, or both, which would have otherwise
been paid to such Employee for services rendered to the Company or its
subsidiaries.
"Payment Date" means the date as of which payments are due to commence
under the Plan.
"Plan" means the Niagara Mohawk Holdings, Inc. Deferred Compensation Plan
(including any Appendices), as set forth herein and as amended from time
to time.
"Plan Year" means the calendar year.
"Salary" means the annualized rate of an Employee's normal base cash
compensation, prior to any deferrals and exclusive of overtime, bonuses,
special or incentive pay or any fringe benefits determined as of December
31 of each year prior to the beginning of the next Plan Year.
"Total Disability" means the Participant's physical or mental inability to
perform substantially the Participant's duties of employment with the
Company or its subsidiaries for a period exceeding 12 consecutive months,
as determined by a licensed physician selected by the Administrator.
3. DEFERRAL ELIGIBILITY AND PARTICIPATION
3.1 An Eligible Employee shall be eligible to participate in the Plan as
of the first day of the Plan Year after completion and submission to the
Administrator of an election form, pursuant to Section 4 of the Plan.
3.2 No later than the November 1 preceding a Plan Year, the
Administrator shall notify each Eligible Employee of eligibility to participate
in the Plan for that Plan Year.
4. ELECTION TO DEFER
4.1 By November 30 prior to the beginning of a Plan Year, an Eligible
Employee may elect, irrevocably, by written notice to the Administrator on an
election form, to defer payment of a percentage of Salary or an Incentive
Award,or both, otherwise payable during such Plan Year. The deferral percentage
applicable to Salary shall be in 5% increments, not to exceed 25% of Salary.
The deferral percentage applicable to an Incentive Award shall be in 10%
increments, not to exceed 100% of an Award.
4.2 Notwithstanding any provisions in the Plan to the contrary, an
Employee or other individual who becomes an Eligible Employee during a Plan
Year may elect, in the manner described in Section 4.1 of the Plan, to defer a
percentage of Salary otherwise payable during the remainder of the Plan Year or
an Incentive Award, or both, provided such election is made, irrevocably,
within thirty (30) days after being notified that such individual is an
Eligible Employee.
4.3 Salary deferred under the Plan will be ratably deducted in each pay
period in the Plan Year. An expressed percentage shall apply to any Salary
changes during the Plan Year.
4.4 The Deferral Period shall be, irrevocably, a period beginning as of
the first day of the Plan Year to which the deferral election applies and
ending on the earliest of:
(a) the date the Participant retires at early or normal retirement
age under the tax-qualified defined benefit pension plan maintained by the
Company, in which the Participant participates, or
(b) the date the Participant terminates employment with the Company
for any other reason, including death or Total Disability; or
(c) the date the Participant's employment with the Company is deemed
terminated by reason of Constructive Termination.
4.5 Although an election to defer under the Plan is irrevocable, the
Administrator may authorize a Participant to reduce or waive such election for
the remainder of the Plan Year upon a finding that the Participant has
suffered a financial hardship, within the meaning of Section 7.2 of the Plan.
4.6 The company shall deduct from any deferred Salary and Incentive
Award, any FICA, FUTA or Medicare taxes required to be withheld.
5. DEFERRAL ACCOUNT
5.1 As of the last day of each month, the Company shall credit to a
Participant's Deferral Account the amount deferred for that month in accordance
with the Participant's deferral election pursuant to Section 4.1 of the Plan
reduced by the applicable withholding for FICA taxes.
5.2 The Company shall credit earnings to each Participant's Deferral
Account until the entire Deferral Account has been distributed. For any
calendar year, the rate of credited earnings shall be the equivalent of the
rate of return on the investment fund or funds selected by the Participant.
A Participant may select from the investment funds designated from time to time
by the Administrator, and shall elect, in 1% increments, the portion of his or
her Deferral Account considered invested in such fund or funds for the purpose
of credited earnings. Earnings shall be credited to a Participant's Deferral
Account as of the last day of each month. A Participant may change his or her
investment fund selection monthly; any such investment fund change shall be
effective as of the first day of the month following such deferral election.
Notwithstanding the foregoing provisions of this Section 5.2, neither the
Company nor the Administrator, nor any agent thereof, shall be under any
obligation whatsoever to have any assets or other funds actually invested on
behalf of the Participant in the investment fund or funds selected by the
Participant for the purpose of credited earnings.
5.3 (a) Funds held for a Participant shall be held as a general asset of
the Company subject to the Company's general creditors. No Participant or
beneficiary shall have any security interest whatsoever in any assets of the
Company. To the extent that any person acquires a right to receive payments
under the Plan, such right shall not be secured or represented by any assets of
the Company.
(b) Participants have the status of general unsecured creditors of
the Company with respect to their Deferral Accounts, and the Plan constitutes a
mere promise by the Company to make payments of deferred Salary or Incentive
Award(s) in the future. It is the intention of the Participants and the
Company that the Plan be unfunded for tax purposes and for purposes of Title I
of ERISA.
5.4 Each Participant's Deferral Account shall be maintained on the books
of the Company until full payment has been made to the Participant or
beneficiary. The Company may, but shall not be required to, set funds aside
for the Deferral Account. Any funds that are so set aside shall be subject to
claims of the Company's general creditors, as provided in the document
governing the funds.
5.5 Upon the request of a Participant, but no more frequently than
quarterly, the Administrator shall provide a statement of any amounts credited
to such Participant's Deferral Account.
6. TIME AND MANNER OF PAYMENT
6.1 Subject to Section 7, a Participant's Payment Date shall be the first
of the month after the earliest of the following:
(a) the date the Participant retires at normal or early retirement
age under the tax-qualified defined benefit pension plan
maintained by the Company, in which the Participant participates;
or
(b) the date the Participant terminates employment with the Company
for any other reason, including death or Total Disability; or
(c) the date the Participant's employment with the Company is deemed
terminated by reason of Constructive Termination.
6.2 The value of a Participant's Deferral Account shall be determined as
of the last day of the month immediately preceding the Payment Date.
6.3 The distribution of a Participant's Deferral Account shall be in
cash, in one of the following methods as the Participant selects in writing to
the Administrator at the time of his or her last deferral election under
Section 4.1 of the Plan:
(a) a single sum paid within thirty (30) days after the Payment Date;
or
(b) substantially equal annual installments starting on the Payment
Date and paid over a specified period, not to exceed ten (10)
years.
In the event the Participant shall for any reason fail to timely
select a method of distribution pursuant to the foregoing provision of this
Section 6.3, such Participant's Deferral Account shall be paid in accordance
with method (b) above over ten (10) years.
6.4 The Company may withhold from any payment under the Plan any taxes or
other amounts as required by law. Any taxes imposed on Plan benefits shall be
the sole responsibility of the Participant or beneficiary.
7. WITHDRAWALS
7.1 A Participant or surviving spouse may withdraw amounts before those
amounts would otherwise have been paid because of financial hardship, as
determined by the Administrator. The withdrawal shall be limited to the amount
reasonably necessary to meet the financial hardship.
7.2 "Financial hardship" means a severe financial hardship resulting from
a sudden and unexpected illness or accident of the Participant or a dependent
(as defined in Code Section 152(a)) of the Participant, loss of the
Participant's property due to casualty, or other similar extraordinary and
unforeseeable circumstances arising as a result of events beyond the control of
the Participant. The circumstances that will constitute a financial hardship
will depend upon the facts of each case, but, in any case, payment may not be
made to the extent that such hardship is or may be relieved (i) through
reimbursement or compensation by insurance or otherwise, (ii) by liquidation of
the Participant's assets, to the extent the liquidation of such assets would
not itself cause severe financial hardship, or (iii) by cessation of the
Participant's election to defer under the Plan.
7.3 The Administrator shall establish guidelines and procedures for
implementing withdrawals. An application shall be in writing, signed by the
Participant or surviving spouse and include a statement of facts causing the
financial hardship and any other facts required by the Administrator.
7.4 The withdrawal date shall be determined by the Administrator. The
Administrator may require a minimum advance notice and may limit the amount,
time and frequency of withdrawals.
8. DEATH OR DISABILITY
8.1 Upon death of a Participant, the value of the Deferral Account shall
be paid within thirty (30) days after receipt of satisfactory proof of death,
in the following order of priority:
(a) to the beneficiary designated by the Participant in writing to
the Administrator; or if none
(b) to the Participant's surviving spouse; or if none
(c) to the Participant's descendants, per stirpes; or if none
(d) to the Participant's estate.
8.2 All beneficiary designations shall be in writing and signed by the
Participant, and shall be effective only if and when delivered to the
Administrator during the lifetime of the Participant. A Participant may,
during his or her lifetime, change the beneficiary or beneficiaries by a
signed, written instrument delivered to the Administrator. The payment of
amounts shall be in accordance with the last unrevoked written designation of
the beneficiary that has been signed and so delivered.
8.3 If the recipient is the surviving spouse and the Participant had
selected an installment payout, distribution of the Deferral Account balance
will be by installments in accordance with the election, subject to Section 7.
In all other cases, distribution will be by a single sum payment.
8.4 A Participant who terminates employment by reason of Total Disability
shall be entitled to payment of his or her Deferral Account in accordance with
Section 6.3.
9. PLAN TERMINATION AND AMENDMENT
9.1 The Board may terminate or suspend the Plan at any time for any
reason, without prior notice to any Participant or beneficiary. On termination
or suspension of the Plan the following shall apply:
(a) amounts deferred through the last month before the effective date
of termination or suspension shall remain deferred and shall be
credited to the Participants' Deferral Accounts in accordance
with the Plan.
(b) deferral elections shall terminate as of the effective date of
the Plan termination or suspension, and no further deferrals
shall be allowed.
(c) amounts credited to a Deferral Account shall remain to the credit
of the Account. In the event of Plan termination, the Account
shall continue to be credited with earnings, in accordance with
Section 5.2 of the Plan, until the effective date of Plan
termination, and any amounts credited to the Account shall be
paid out in a single sum payment as soon as practicable after
Plan termination. In the event of Plan suspension, the Account
shall continue to be credited with earnings, in accordance with
Section 5.2 of the Plan, and shall be paid out in accordance with
the provisions of the Plan.
9.2 The Board may amend this Plan; an amendment may be retroactive within
a Plan Year except that the right of Participants to defer Salary and Incentive
Awards may not be reduced for the portion of the Plan Year through the month in
which the amendment was adopted and no amendment may reduce a Participant's
Deferral Account balance as of the effective date of such amendment.
If the Internal Revenue Service determines that any amount deferred
under this Plan will be subject to current income taxation, all amounts to
which the determination is applicable will be paid to the Participants within
thirty (30) days of such determination.
10. ADMINISTRATION
10.1 The Plan shall be administered by the Administrator. The
Administrator, in its sole discretion, shall interpret the Plan, determine
eligibility, see that the records are maintained, and assume responsibility for
ensuring that the Plan is operated in accordance with its purpose. The
Administrator may delegate any of its responsibilities to such person or
persons or committees, and may appoint such agents, as it shall deem
necessary or advisable.
10.2 The Company shall be solely responsible for providing Plan benefits,
and the Administrator, any officer, employee or agent of the Company shall not
be liable for such benefits.
The Administrator, its delegate, any officer, employee or agent of the Company
shall not be liable for any action or failure to act with respect to the Plan,
except where such act or omission was willful, intentional, or fraudulent. The
Company shall indemnify and hold harmless the Administrator and any officer or
employee of the Company against any claims, loss, damage, expense or liability
arising from any action or failure to act with respect to the Plan except where
such act or omission was willful, intentional or fraudulent.
11. CLAIMS PROCEDURE
11.1 Original Claim
Any person claiming a benefit, requesting an interpretation or ruling
under the Plan, or requesting information under the Plan shall present the
request in writing to the Administrator which shall respond in writing as soon
as practicable, but within sixty (60) days.
11.2 Denial
If the claim or request is denied, the written notice of denial shall
state:
(a) the reasons for denial, with specific reference to the Plan
provisions on which the denial is based;
(b) a description of any additional material or information required
and an explanation of which it is necessary; and
(c) an explanation of the Plan's claim review procedure.
11.3 Request for Review
Any person whose claim or request is denied or who has not received a
response within sixty (60) days may request review by notice given in writing
to the Administrator. The claim or request shall be reviewed by the
Administrator or a designated committee of the Administrator which may, but
shall not be required to, have the claimant appear before it. On review,
the claimant may have representation, examine pertinent documents, and submit
issues and comments in writing. The Administrator shall be the named
fiduciary for the review of denied claims under ERISA.
11.4 Final Decision
The decision of review shall normally be made within ninety (90) days. If
an extension is required for a hearing or other special circumstances, the
claimant shall be so notified and the time limit shall be one hundred twenty
(120) days. The decision shall be in writing and shall state the reasons and
the relevant Plan provisions. All decisions on review shall be final and bind
all parties concerned.
12. MISCELLANEOUS PROVISIONS
12.1 The rights of a Participant under this Plan are personal and, prior
to a Payment Date, are not subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors of the Participant or the Participant's beneficiary. In the event
the Company elects to invest any funds deferred hereunder, such funds and the
earnings thereon shall remain the exclusive property of the Company.
12.2 If the Company merges, consolidates, or otherwise reorganizes, or
its assets or business are acquired by another company, this Plan shall
continue with respect to those Participants who continue in the employ of the
successor company. In such an event, however, a successor corporation may
terminate or suspend the Plan as to its employees on the effective date of the
succession or thereafter in accordance with Section 9 of the Plan. In any
such event, Participants will be notified promptly.
12.3 All Participants understand they are employees at will. Therefore,
nothing in the Plan shall interfere with or limit in any way the right of the
Company to terminate, for any reason, any Participant's employment at any time,
nor confer upon a Participant any right to continue in the employ of the
Company or any subsidiary or continue as an Eligible Employee.
12.4 If any Plan provision, or its application to any Participant or
beneficiary, is held to be invalid or illegal, neither the remainder of the
Plan nor its application to any other Participant or beneficiary shall be
affected.
12.5 Participation in the Plan shall not reduce any Company welfare
benefit based upon Salary, but neither the Salary nor Incentive Award deferred
under the Plan nor any Plan benefits shall be counted as compensation for
purposes of the Company's tax-qualified retirement plans.
12.6 If a Plan benefit is payable to a person incapable of handling the
disposition of property, the Administrator or its delegate may direct payment
of such benefit to the person taking care of the Participant. Such
distribution shall completely discharge the Administrator and the Company
from all liability with respect to such payments.
12.7 The Plan, and all forms or agreements hereunder, shall be construed
in accordance with and governed by the laws of the State of New York (other
than the conflict of laws provisions) except to the extent that such laws may
be preempted by federal law.
APPENDIX A
For purposes of the Plan, the term "Change in Control" shall mean:
(1) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of 20% or more of either (i) the then outstanding shares of common
stock (the "Outstanding Company Common Stock") of Niagara Mohawk Holdings,
Inc. or (ii) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided,
however, that the following acquisitions shall not constitute a Change in
Control: (i) any acquisition directly from the Company (excluding an
acquisition by virtue of the exercise of a conversion privilege), (ii) any
acquisition by the Company, (iii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (iv) any acquisition by any
corporation pursuant to a reorganization, merger or consolidation, if,
following such reorganization, merger or consolidation, the conditions
described in clauses (i), (ii) and (iii) of subparagraph (3) of this
Schedule A are satisfied; or
(2) Individuals who, as of the date hereof, constitute the
Company's Board of Directors (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board; provided, however, that
any individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(3) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, in each case, unless, following
such reorganization, merger or consolidation, (i) more than 75% of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger or consolidation
and the combined voting power of the then outstanding voting securities of
such corporation entitled to vote generally in the election of directors
is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same
proportions as their ownership, immediately prior to such reorganization,
merger or consolidation, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (ii) no Person
excluding the Company, any employee benefit plan (or related trust) of the
Company or such corporation resulting from such reorganization, merger or
consolidation and any Person beneficially owning, immediately prior to
such reorganization, merger or consolidation, directly or indirectly, 20%
or more of the Outstanding Company Common Stock or Outstanding Voting
Securities, as the case may be, of, respectively, the then outstanding
shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of
the then outstanding voting securities of such corporation entitled to
vote generally in the election of directors and (iii) at least a majority
of the members of the board of directors of the corporation resulting from
such reorganization, merger or consolidation were members of the Incumbent
Board at the time of the execution of the initial agreement providing for
such reorganization, merger or consolidation; or
(4) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company, or
Niagara Mohawk Power Corporation, other than to a corporation, with
respect to which following such sale or other disposition, (A) more than
75% of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such sale or
other disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities as the case
may be, (B) no Person excluding the Company and any employee benefit plan
(or related trust) of the Company or such corporation and any Person
beneficially owning, immediately prior to such sale or other disposition,
directly or indirectly, 20% or more of the Outstanding Company Common
Stock or Outstanding Company Voting Securities, as the case may be,
beneficially owns directly or indirectly, 20% or more of, respectively,
the then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and
(C) at least a majority of the members of the board of directors of such
corporation were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board providing for
such sale or other disposition of assets of the Company.
<PAGE>
EXHIBIT 11
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
Computation of the Average Number of Shares of Common Stock Outstanding
For the Three Months and Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
(4)
Average Number of
Shares Outstanding
As Shown on the
Consolidated
(1) (2) (3) Statement of
Shares of Number of Share Income
Common Days Days (3 divided by number
Stock Outstanding (2 x 1) of Days in Period)
- ------------------------------------------------------------------------------------------------------------
For the Three Months Ended June 30:
-----------------------------------
<S> <C> <C> <C> <C>
APRIL 1 - JUNE 30, 1999 . . . . . . 187,364,863 91 17,050,202,533 187,364,863
=========== ============== ===========
April 1 - June 30, 1998 . . . . . . 144,419,351 91 13,142,160,941
Shares issued in accordance
with the MRA Agreement -
June 30. . . . . . . . . . . . . 42,945,512 1 42,945,512
----------- --------------
187,364,863 13,185,106,453 144,891,280
=========== ============== ===========
For the Six Months Ended June 30:
---------------------------------
MARCH 18 - JUNE 30, 1999. . . . . . 187,364,863 105 19,673,310,615 187,364,863
=========== ============== ===========
January 1 - June 30, 1998 . . . . . 144,419,351 181 26,139,902,531
Shares issued in accordance
with the MRA Agreement -
June 30. . . . . . . . . . . . . 42,945,512 1 42,945,512
----------- --------------
187,364,863 26,182,848,043 144,656,619
=========== ============== ===========
</TABLE>
Note 1: On March 18, 1999, the common stock of Niagara Mohawk was exchanged
on a share-for-share basis with Holdings. The number of shares of
common stock outstanding for the three months and six months ended
June 30, 1998 is Niagara Mohawk's.
Note 2: Earnings per share calculated on both a primary and fully diluted
basis are the same due to the effects of rounding.
<PAGE>
EXHIBIT 12A
NIAGARA MOHAWK HOLDINGS, INC. AND SUBSIDIARY COMPANIES
Statement Showing Computation of Ratio of Earnings to Fixed Charges
for the Twelve Months Ended June 30, 1999
(in thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
A. Net Income (Loss) . . . . . . . . . . . . . . . $ (3,156)
B. Taxes Based on Income or Profits. . . . . . . . 7,589
---------
C. Earnings, Before Income Taxes . . . . . . . . . 4,433
D. Fixed Charges (a). . . . . . . . . . . . . . . 599,490
---------
E. Earnings Before Income Taxes and Fixed Charges. $603,923
=========
F. Ratio of Earnings to Fixed Charges (E / D). . . 1.01
=========
</TABLE>
(a) Includes a portion of rentals deemed representative of the
interest factor ($26,232) and earnings required to cover
subsidiary preferred stock dividends ($36,209)
<PAGE>
EXHIBIT 12B
NIAGARA MOHAWK POWER CORPORATION AND SUBSIDIARY COMPANIES
Statement Showing Computation of Ratio of Earnings to Fixed
Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
for the Twelve Months Ended June 30, 1999
(in thousands of dollars)
<TABLE>
<CAPTION>
<S> <C>
A. Net Income (Loss) . . . . . . . . . . . . . . . $ 32,414
B. Taxes Based on Income or Profits. . . . . . . . 7,483
--------
C. Earnings, Before Income Taxes . . . . . . . . . 39,897
D. Fixed Charges (a). . . . . . . . . . . . . . . 563,281
--------
E. Earnings Before Income Taxes and Fixed Charges. $603,178
========
Preferred Dividend Factor:
H. Preferred Dividend Requirements . . . . . . . . $ 36,209
I. Ratio of Pre-tax Income to Net Income (C / A) . 1.23
--------
J. Preferred Dividend Factor (H x I) . . . . . . . 44,537
K. Fixed Charges as Above (D). . . . . . . . . . . 563,281
--------
L. Fixed Charges and Preferred Dividends Combined. $607,818
========
M. Ratio of Earnings to Fixed Charges (E / D). . . 1.07
========
N. Ratio of Earnings to Fixed Charges and
Preferred Dividends Combined (E / L) . . . . 0.99
========
</TABLE>
(a) Includes a portion of rentals deemed representative of the
interest factor ($26,232).
<PAGE>
EXHIBIT 15
August 13, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that our report dated August 13, 1999 on our review of interim
financial information of Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power
Corporation as of and for the three-month and six-month periods ended June 30,
1999 and included in Niagara Mohawk Holdings, Inc. and Niagara Mohawk Power
Corporation quarterly report on Form 10-Q for the quarter then ended is
incorporated by reference in Niagara Mohawk Holdings, Inc. Registration
Statement on Form S-8 (No. 333-13781) and in the Prospectus constituting part of
the Registration Statement on Form S-3 (No. 333-55923); and incorporated by
reference in Niagara Mohawk Power Corporation Registration Statements on Form
S-8 (Nos. 33-36189 and 33-42771) and in the Prospectus constituting part of the
Registration Statements on Form S-3 (Nos. 33-50703, 33-51073, 33-54827, and
33-55546) and in the Prospectus/Proxy Statement constituting part of the
Registration Statement on Form S-4 (No. 333-49769).
Yours very truly,
PRICEWATERHOUSECOOPERS LLP
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME, AND
CONSOLIDATED STATEMENT OF CASH FLOWS OF NIAGARA MOHAWK HOLDINGS, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001079182
<NAME> Niagara Mohawk Holdings, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 6476875
<OTHER-PROPERTY-AND-INVEST> 383371
<TOTAL-CURRENT-ASSETS> 1489574
<TOTAL-DEFERRED-CHARGES> 5380790
<OTHER-ASSETS> 117627
<TOTAL-ASSETS> 13848237
<COMMON> 1874
<CAPITAL-SURPLUS-PAID-IN> 2520942
<RETAINED-EARNINGS> 660825
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3183641
67190
440000
<LONG-TERM-DEBT-NET> 5885044
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 730247
7620
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3534495
<TOT-CAPITALIZATION-AND-LIAB> 13848237
<GROSS-OPERATING-REVENUE> 2033455
<INCOME-TAX-EXPENSE> 25769
<OTHER-OPERATING-EXPENSES> 1700454
<TOTAL-OPERATING-EXPENSES> 1700454
<OPERATING-INCOME-LOSS> 333001
<OTHER-INCOME-NET> (3414)
<INCOME-BEFORE-INTEREST-EXPEN> 329587
<TOTAL-INTEREST-EXPENSE> 260235
<NET-INCOME> 14785
18048
<EARNINGS-AVAILABLE-FOR-COMM> 14785
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 467598
<EPS-BASIC> .08
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF INCOME, AND
CONSOLIDATED STATEMENT OF CASH FLOWS OF NIAGARA MOHAWK POWER CORPORATION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000071932
<NAME> Niagara Mohawk Power Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 6476875
<OTHER-PROPERTY-AND-INVEST> 334286
<TOTAL-CURRENT-ASSETS> 1370782
<TOTAL-DEFERRED-CHARGES> 5380790
<OTHER-ASSETS> 116901
<TOTAL-ASSETS> 13679634
<COMMON> 187365
<CAPITAL-SURPLUS-PAID-IN> 2358510
<RETAINED-EARNINGS> 485719
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3031594
67190
440000
<LONG-TERM-DEBT-NET> 5885044
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 730247
7620
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3517939
<TOT-CAPITALIZATION-AND-LIAB> 13679634
<GROSS-OPERATING-REVENUE> 1966482
<INCOME-TAX-EXPENSE> 25663
<OTHER-OPERATING-EXPENSES> 1629734
<TOTAL-OPERATING-EXPENSES> 1629734
<OPERATING-INCOME-LOSS> 336748
<OTHER-INCOME-NET> (7907)
<INCOME-BEFORE-INTEREST-EXPEN> 328841
<TOTAL-INTEREST-EXPENSE> 260235
<NET-INCOME> 32193
18048
<EARNINGS-AVAILABLE-FOR-COMM> 14145
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 487024
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
